Is QQQ From Venus and DIA From Mars?

The Tom Hanks-created movie “That Thing You Do” comes to mind when I look at the wild gyrations occurring between the $283 billion the Invesco QQQ Trust ETF (QQQ) and the “puny by comparison” $34 billion SPDR Dow Jones Industrial Average ETF (DIA). 

Both ETFs have been around for about 25 years, and for the first 20 years of their relationship, they had periods in which they performed differently. However, through mid-December of 2019, 20 years after their common inception date, they were just about dead-even.  

But that photo-finish after two decades together was not a sign of things to come for two of the three iconic measures of U.S. stocks, alongside the S&P 500. But it did indicate that for a very long time, when we said, “the stock market,” we could be talking about either the Dow or the Nasdaq, and they were correlated.

QQQ Wins Big  

But since the start of 2020, the score is completely different. Specifically, QQQ has more than doubled, while DIA has appreciated by barely half that, "only" 55%. We might blame the onset of the pandemic, which threw off everything in business and market while boosting fortunes of the QQQ-type stocks that would thrive on an at-home economy as compared to DIA’s much greater diversified allocation. I could blame the pandemic. And I will.

When we look at how different markets now today versus five years ago, it's astounding to those of us who remember when the Dow was the only thing that people meant when they referred to “the stock market.” The Dow companies were the “blue chips,” and now those chips reside in QQQ.  

QQQ holds the transformative computer chip stocks that essentially took the dot.com bubble’s blowout success and said, “hold my beer.” This generation’s QQQ and Nasdaq 100 stock index have been so successful, an entire crew of newer investors may not realize just how unique this period has been.

And what has taken place during the past several months is a sign: something's happening that all investors must reckon with before too long. Specifically, QQQ and DIA have a growing tendency to act more like a stock market version of yin and yang—moving very differently, yet together making a market that appears to be in harmony.  

While some might be quick to chock this up something having to do with specific trends within QQQ or DIA’s top holdings, that may be over-simplifying it. Some specific and recent data on QQQ and DIA versus each other helps drive home this point.  

I looked at all 10-day return periods for both ETFs going back to their common inception at the end of last century. It turns out that an abnormally high portion of cases where QQQ’s return far outpaced that of DIA have occurred since just the start of last year. That’s one piece of this quant/macro market puzzle.

Recent Stock Market Moves a Sign of Caution

The next is what has occurred just these past two months of June and July. Most of the periods tracked during those months showed that the 10-day return difference between these two popular market measures have resulted in a difference of 5% or more. However, unlike what has occurred since the start of the pandemic, DIA has recently been the dominator, with some stretches in which it made high short-term returns at a time when QQQ declined.

That’s the tip of the iceberg with the data I ran. But the point is clear (at least to me): something is going on that is more accurately described not as unique or uncommon, but as eerie. This type of flip-flopping, where one day QQQ is in favor, and DIA sells off, then they reverse roles seemingly overnight, is a sign that investors are vulnerable to seeing prices get whipped around. This type of volatility between these two ETFs has typically occurred only during the early days of the dot com bubble bursting, and again in the early days of the pandemic.

Investing is not simply about trying to find winners and avoid losers. It is about trying to determine when the wind is changing. I can see the trees blowing from inside the house. So for ETF investors, this is a great time to focus on how this DIA and QQQ battle evolves.