The PowerShares QQQ Trust (NASDAQ:QQQ) is a relatively safe exchange-traded fund. After all, it’s a bundle of the 100 largest companies listed on the Nasdaq, commonly known as the Nasdaq-100. It trades millions of units daily. And QQQ’s 18% year-to-date gain looks pretty good, too.
Still, as this week has shown, the popular ETF’s particular flavor — not-so-diversified large-caps — doesn’t make it an all-weather pick.
For one, the market cap-weighted nature of the Nasdaq-100 Index makes the QQQ pretty lopsided. Apple (NASDAQ:AAPL) is the top holding, representing nearly 20% of the index, and the fund’s top 10 holdings represent 57% of the fund (as math would have it, that leaves the remaining 43% scattered among 90 companies). That means big moves in just a few stocks can have serious consequences on the ETF … and when Apple moves, watch out!
Past that, QQQ’s top eight stocks — Apple, Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), Oracle (NASDAQ:ORCL), Intel (NASDAQ:INTC), Amazon.com (NASDAQ:AMZN), Qualcomm (NASDAQ:QCOM) and Cisco (NASDAQ:CSCO) — are tech operators. All told, the index’s tech concentration is a whopping 63.4%, with consumer cyclicals (13%) and healthcare companies (10%) the only other major blocs.
Not that a tech-heavy fund is necessarily a bad thing; for instance, the Select Sector Technology SPDR (NYSE:XLK) is a particularly popular tech fund that has ripped off 100% gains in less than three years.
But that heavy concentration does mean that a bad week for tech is a bad week for QQQ, despite its other holdings. And this has been a bad week for tech.
The QQQ has lost more than 1% — and is off 3% in just two days — amid a slew of ominous earnings reports from the mega-tech operators. The slowdown in PCs has impacted players like Intel and Microsoft. Meanwhile, weak global spending has put the hurt on software sales, which impacted IBM. Google is having problems monetizing mobile … of course, it’s even having problems timing its earnings releases.
And yes, even Apple isn’t immune to struggle. Its sleek new iPhone 5 isn’t wanting for demand — but Apple is finding itself coming up short on the production side.
Importantly for investors looking ahead, many of these headwinds don’t have any quick-fix solutions, which could mean more pressure on a number of the QQQ’s biggest names.
Thus, for now, you might be better off avoiding the QQQ and getting your large-cap exposure elsewhere.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.