ETF Offers Momentum Twist On Large Cap Growth

Key Takeaways

• While the broader Nasdaq-100 Index is dominated by mega-cap growth stocks, an ETF tracking a newer smart beta version of the index, the ProShares Nasdaq-100 Dorsey Wright Momentum ETF (QQQA), is actually more diversified despite holding 21 securities.  
• The equally weighted ETF owns companies with the highest relative strength, and currently includes Alphabet (GOOG.L), Facebook (FB) and NVIDIA (NVDA).
• When QQQA rebalanced last week, there were moderate changes to the sector allocation, as the ETF chooses stocks within a growth-oriented parent benchmark.

Fundamental Context

A handful of large cap growth stocks in the Nasdaq-100 Index have garnered sizable investor attention. The market capitalizations for the stocks so-called FANMAG cohort of growth stocks—represented by FB, Amazon.com (AMZN), Netflix (NFLX), Microsoft (MSFT), Apple (AAPL) and GOOG.L—have climbed sharply higher in recent years. These six companies comprise 44% of the assets of the Invesco QQQ Trust (QQQ), the $181 billion ETF tracking the Nasdaq-100.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

But in recent months, some of these stocks have not exhibited relative strength within the index, while some constituents from the consumer discretionary, health care and information technology sectors look better on a technical basis. A new ETF from ProShares, QQQA, seeks to identify companies within the broader index with the greatest potential to outperform using relative strength analytics.

Figure 1: Exposure To FANMAG Stocks In Select ETFs (% of assets)

Source: CFRA’s ETF Database. As of July 16, 2021.

QQQA owns shares of FB and GOOGL, but not the other four FANMAG companies. As of July 16, the ProShares ETF had a combined 9.6% assets in FANMAG stocks, owning stakes in other attractively valued consumer discretionary and information technology stocks such as ASML Holding (ASM), Broadcom (AVGO), Marriott International (MAR), and NXP Semiconductor (NXPI).

QQQA holds only 21 stocks and rebalances quarterly to focus on the highest momentum securities; FB was one of the eight stocks to be added during the July 16 rebalance. Another key difference between QQQA and the well-established QQQ is that the former’s index is equally weighted on the rebalance date, rather than employing a modified market-cap-weighted approach used by the latter.

Tamping Down On Technology

By fishing within the Nasdaq-100 universe, QQQA has maintained a hefty stake in information technology. When the $15 billion iShares MSCI USA Momentum Factor ETF (MTUM) completed its semiannual rebalance in late May, the resulting ETF had more of a value tilt than the growth one it had before. The weighting in information technology stocks declined to 18% of assets as of July 16, from 42% at the end of April, while the stake in financials was recently 31%, up from 1.5%. MTUM seeks out companies with strong price momentum within the broader MSCI USA Index.

As shown in Figure 2, QQQA still held 42% of assets in information technology stocks after the mid-July rebalance, compared to 51% at the end of April. While Microchip Technology (MCHP) and Micron Technology (MU) were among the eight stocks removed from the portfolio in mid-July, Intuit (INTU) and NVDA were added. There was also a net addition of three health care stocks, as Biogen (BIIB), Illumina (ILMN) and Moderna (MRNA) joined QQQA, pushing the ETF’s health care weighting up to 25%, from a prior 10%. There are no financial stocks in QQQA or its parent Nasdaq index. 

Figure 2: Sector Breakdown Of MTUM & QQQA Before & After Rebalancing (% of assets)

Source: CFRA’s ETF Database. As of July 16, 2021.

CFRA will be hosting a webinar on this topic on July 27 at 11 a.m. ET. To register for the live event, visit: https://go.cfraresearch.com/Momentum_Strategies.

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