Kubie: The Problem With The ‘Q’s’

May 09, 2014

What if the exposure the ‘Q’s’ provides could be replicated more effectively with other ETFs?

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Scott Kubie, chief investment strategist of Omaha, Neb.-based CLS Investments.

Of all the large ETFs, the PowerShares QQQ (QQQ | A-51) is the one I struggle to include in portfolios. I just can’t quite figure out how to categorize it, and, as far as that goes, I also struggle with which QQQ alternatives are the most appropriate.

To be clear, performance isn’t the source of my criticism. The ‘Q’s,’ which tracks the Nasdaq 100 Index, has risen at an annualized rate of 10.45 percent over the 10 years ending April 30, 2014, handily outpacing the S&P 500 Index, which is up 7.67 percent.

The companies included behind QQQ are not the reason I struggle with it either. The Nasdaq’s indexing unit seems to be very innovative and focused on expansion. The decision to launch the index was to better compete with the New York Stock Exchange and emphasize the companies on the exchange, and it was brilliant.

Moreover, PowerShares’ move to become the sponsor of the QQQ in 2007 was bold, and catapulted the company higher in the ETF provider ranks.

No, my challenges with the Nasdaq 100 Index and the QQQ ETF are more fundamental, and I believe can be broken down to concerns with their criteria, stability and risk.

  • Criteria: The index is organized around nonfundamental factors,
  • Stability: The index is vulnerable to large changes that undermine its historical consistency,
  • Risk: The index leaves out securities that could improve diversification,

For some investors and many traders, the QQQ has a wonderful combination of high risk and high volume. For investors focusing on measuring and managing risk, the QQQ’s challenges in the areas listed above make it a less effective tool for managing the risk and sector allocation in a portfolio.

So, let’s look at each of these factors more closely.

 

Find your next ETF

Reset All