Nasdaq Exposure for Investors Beyond QQQ

The long-term round trip taken by the Invesco QQQ Trust (QQQ) may not be front of mind for investment advisors and investors, but maybe it should be. 

The iconic QQQ, one of the few ETFs with its own TV commercials, 2023 ended 2023 around where it did in late November 2021 with the share price at $409. In other words, last year’s 55% runup only returned QQQ to where it had traded more than 24 months earlier.

This has prompted a debate about whether we are in a new bull market, or whether this is the classic bear market trick, where the leading stock market averages rally like there’s no tomorrow, only to struggle, then fade from their previous highs. But since the answer to that question is unknowable and out of the control of every advisor and investor, let’s instead focus on what investors can do.

Peace, love and QQQ? 

 Those who celebrated the holidays last month with a toast to peace, love and the QQQ ETF may be holding that ETF with gains that it typically takes three or four good years to achieve, not one year. Following a 33% drop in QQQ during 2022, the opportunity when viewed in hindsight to buy the dip produced gains of significance. 

But as the old investment adage goes, making it is one thing, keeping it is another. So, for those sitting on a pile of unrealized gains, who have decided this is not the time to bail, the flexibility of the ETF market and structure of those funds opens the door for enjoying the benefits without the downside. And while we all likely had our fill of dessert the past few weeks, what’s one more piece of cake among friends, or QQQ holders? 

 QQQ's Allocation

Let’s remind ourselves exactly what QQQ is today, because if you bought it during the past year, it has changed. Even with a rare interim rebalancing during 2023 to avoid violating some diversification mandates for institutional holders, eight stocks occupy 43% of QQQ’s assets. And QQQ owns the 100 largest Nasdaq stocks. It tracks the Nasdaq 100 Index, not the full Nasdaq Composite. 

So, the issues for nervous QQQ holders could be any of these, or others: 

• Highly concentrated in the ‘Magnificent Seven” stocks 
• Highly concentrated in three sectors (technology, communications and consumer cyclical combine for 70% of QQQ) 
• Expensive fundamentally, with a trailing price-earnings ratio of about 30 
• Very low dividend yield (0.64%) 

QQQE, QQQJ 

• The Direxion Nasdaq 100 Equal Weighted ETF (QQQE) owns the same 100 stocks, but weights them the same, avoiding the top-heavy issues of QQQ. This $1.1 billion ETF trades at a discount to QQQ, with a trailing price earnings ratio of 25.6. However, since so many Nasdaq 100 stocks are in the tech sector, QQQE’s 39% weighing there, plus 11% each to communications and cyclical stocks are still more than 60% of the fund combined. 
• The creators of QQQ apparently didn’t stop at the top 100 Nasdaq names, as evidenced by the Invesco Nasdaq Next Gen 100 ETF (QQQJ). QQQJ takes the next 100 largest Nasdaq stocks and creates a portfolio from those. This could be a potential extension of or complement to QQQ for some investors. The ETF is relatively undiscovered, with just $677 million under management. But it is very telling that its P/E ratio is only 20 times, a deep discount to QQQ. QQQJ is weighted by market cap, but in this tier of the Nasdaq, the size of the 100 stocks are much less diverse than what we see in QQQ. 

So, ETFs offer many ways to have your Nasdaq and eat it too. Just go easy on the cake. We just finished the holidays!