QQQ’s Ugly Side Comes Out to Play

by Tom Taulli | October 19, 2012 1:45 pm

The PowerShares QQQ Trust (NASDAQ:QQQ[1]) 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[2]) 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[3]!

Past that, QQQ’s top eight stocks — Apple, Microsoft (NASDAQ:MSFT[4]), Google (NASDAQ:GOOG[5]), Oracle (NASDAQ:ORCL[6]), Intel (NASDAQ:INTC[7]), Amazon.com (NASDAQ:AMZN[8]), Qualcomm (NASDAQ:QCOM[9]) and Cisco (NASDAQ:CSCO[10]) — 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[11]) 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[12] has impacted players like Intel and Microsoft. Meanwhile, weak global spending has put the hurt on software sales, which impacted IBM[13]. Google is having problems monetizing mobile[14] … of course, it’s even having problems timing its earnings releases[15].

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[16], 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.[17]” Follow him on Twitter at @ttaulli[18]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. QQQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=QQQ
  2. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  3. when Apple moves, watch out: https://investorplace.com/2012/07/a-lesson-from-apple-check-your-funds/
  4. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  5. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  6. ORCL: http://studio-5.financialcontent.com/investplace/quote?Symbol=ORCL
  7. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  8. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  9. QCOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=QCOM
  10. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  11. XLK: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLK
  12. The slowdown in PCs: https://investorplace.com/2012/10/microsoft-gives-investors-no-reason-to-buy/
  13. which impacted IBM: https://investorplace.com/2012/10/ibm-exposes-techs-weakness/
  14. having problems monetizing mobile: https://investorplace.com/2012/10/forget-the-flub-googles-larry-page-wants-to-talk-mobile/
  15. timing its earnings releases: https://investorplace.com/2012/10/google-stock-smashed-after-massive-earnings-blunder/
  16. IPOPlaybook: https://investorplace.com/ipo-playbook/
  17. How to Create the Next Facebook.: http://www.amazon.com/gp/product/1430246472/ref=s9_simh_gw_p14_d0_i1?pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center-3&pf_rd_r=0GRB6ZMCTYDZVNG7Q7NV&pf_rd_t=101&pf_rd_p=470938811&pf_rd_i=507846
  18. @ttaulli: https://twitter.com/ttaulli

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