A new 14-year high in the Nasdaq-100 Index (USNQX) is certainly something to celebrate for investors that have ridden the ups and downs of these growth stocks since the start of the 21st century. Veteran traders will remember the exuberant sentiment that pushed the top Nasdaq index to stratospheric heights, only to watch it unwind with devastating results. Now, over a decade later, this technology-heavy basket of stocks is in sight of its all-time highs and appears poised to reach that level, based on its current trajectory.
Most investors access the Nasdaq-100 index through the widely followed PowerShares QQQ Trust, Series 1 ETF (QQQ). This exchange-traded fund boasts total asset of over $40 billion spread amongst the 100 largest domestic and international non-financial companies listed on the Nasdaq stock exchange. The index was conceived in March 1999 and continues to be one of the foremost market indicators along with the SPDR S&P 500 ETF (SPY) and iShares Russell 2000 ETF (IWM).
As a whole, QQQ has an overwhelming 60% slant towards the information technology sector. Apple (AAPL), Microsoft (MSFT), and Google (GOOG) make up the top three holdings of this market-cap weighted ETF. AAPL, in particular, accounts for nearly 14% of QQQ.
The rest of the categories in QQQ are split between consumer discretionary and healthcare sectors, which are largely dominated by cutting edge biotechnology names. What you won’t find in QQQ is any energy, financial, or utilities stocks.
It’s also interesting to note how QQQ has evolved over time to include new high growth companies. Many household names such as Facebook (FB) and Google have only been available as public companies long after the debut of the original Nasdaq-100 index. Facebook and Google have worked their ways into QQQ through sheer offering size and stock price velocity over time as the constituents are evaluated on a quarterly basis.
From a performance perspective, QQQ is the clear leader over both SPY and IWM over the last five years of this most recent bull market. The last 12 months, in particular, have shown a marked leap in relative strength as a result of strong performance in technology and biotech stocks.
The lack of defensive sectors typically found in other broad-based indexes has worked in the favor of QQQ over the last several years. However, investors should be cautious that subsequent dips in the market may lead to this ETF accelerating faster on the downside as well. With the expectation of greater gains comes the adjoining characteristic of higher risk.
The bottom line is that QQQ offers an excellent way to track large, growth-oriented companies in the technology arena through a low-cost investment vehicle. Total expenses to own QQQ on an annual basis are just 0.20%, which should certainly be a fund to monitor and consider for your portfolio if its underlying holdings and asset allocation suit your risk tolerance and time horizon.