Beyond QQQ: Cloud, Cyber ETFs May Outperform

Beyond QQQ: Cloud, Cyber ETFs May Outperform

Cybersecurity, Cloud Computing and Data Centers offer compelling investing narratives.

Reviewed by: Staff
Edited by: Ron Day

The Invesco QQQ Trust (QQQ), a popular $210 billion tech-heavy ETF giant, has returned to the top of the performance charts.  

That’s a good news/bad news situation. A 43% year-to-date gain through Monday’s close is quite a run, but follows a 33% decline last year—so, still down 2%, including dividends, since the start of 2022.  

Clearly, the Nasdaq is back. But with a top-heavy portfolio and selling at 28 times trailing earnings and four times sales, a “Nas-crack” scenario remains on the table à la 1999-2000. Taking a peek back to the feast-or-famine of that time reminds us how QQQ manias can quickly turn into droughts. For example, from March 23, 1999 through March 23, 2000, the Nasdaq 100 Index rose 138%. A year later, the index was down 63%. And over that 24-month period, the net return was -12%. So, certainly a more exaggerated round-trip than what we’ve just seen.

This type of volatility could prompt some ETF investors to look in the direction of technology-driven returns, without being too invested in the Magnificent Seven stocks that have spurred the QQQ rally and spilled over into the S&P 500 as well. 

QQQ is Back, and CIBR, SKYY and VPN also Show Potential  

Here are a few examples of tech sub-sectors that could help start the search process:

The First Trust NASDAQ Cybersecurity ETF (CIBR), which reached $5.1 billion in assets in only eight years, has taken a slice of the Nasdaq market by focusing on what has become a vital industry, considering geopolitical threats as well as the digital economy. While the fund’s 34-stock portfolio is far from cheap, at some point these companies may maintain business momentum better than the mega-caps that become too big to maintain the growth they once had.  

Another example from the same company, the First Trust Cloud Computing ETF (SKYY), uses a modified equal-weight methodology to allocate to 67 different stocks across three groups: Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS). 

A smaller niche fund, the Global X Data Center REITSs and Digital Infrastructure ETF (VPN), offers more of a pure play on a sub-segment of the real estate industry, one that services telecom firms by building cell towers and data centers. With just $32 million in assets, the global ETF holds only 25 stocks, with four names comprising nearly 50% of the total portfolio. Given VPN’s concentrated nature, the fund therefore allows investors—with tremendous transparency—to own a basket of leaders in these industries. 

QQQ is rolling these days—up five days in a row through Monday and on pace for the fund’s best year since 2009. While the big guns at the top of that market cap-weighted ETF have carried the load, there’s always a possibility “trees don’t grow to the sky,” as the saying goes. For those who like technology investing, but aim to look beyond the usual suspects, industries like cybersecurity, cloud computing and data centers are just some of the alternative routes to get there.

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years.