The Invesco QQQ (NASDAQ:QQQ), the Nasdaq-100 tracking exchange-traded fund (ETF), celebrated its 20th anniversary earlier this month, marking a rewarding and, at times, tumultuous two decades on the market.
Today, the QQQ ETF is home to $70.17 billion in assets under management, making it one of the largest US-listed ETFs. To be precise, just five ETFs are larger than QQQ and the fund is within striking distance of the fifth spot. QQQ is also, by far, the biggest ETF offered by Invesco Ltd. (NYSE:IVZ), the fourth-largest U.S. ETF sponsor.
Next to the S&P 500, the Nasdaq-100 Index is one of the most widely followed gauges of U.S. equities — though there are important differences between the QQQ ETF and other domestic broad market funds. For example, financial services is the third-largest sector weight in the S&P 500, but that sector is excluded from the QQQ ETF.
Let’s drill down further on the QQQ ETF to see if it is a fund to buy right here, right now.
Hope You Like Technology
“Despite its reputation as a technology fund, the current characteristics of QQQ position it as a large-cap growth fund, with only 42.6% of the holdings classified as technology companies,” according to Nasdaq. “The fund has evolved since its greatest technology weighting of 78% at the end of 2000, around the height of the tech bubble.”
As of March 15, QQQ’s technology weight was 43.55%, more than double the 20.96% the S&P 500 devotes to the same sector. And while the QQQ ETF’s tech weight is below that 78% seen at the end of 2000, the recent creation of the communication services sector has a lot to do with the QQQ ETF’s reduced tech weight.
The debut of the communication services sector last year pulled stocks, such as Alphabet Inc. (NASDAQ:GOOG GOOGL) and Facebook Inc. (NASDAQ:FB), out of the tech sector and into communication services.
No matter how an investor slices it, QQQ is overweight large-cap tech in significant fashion.
Going With Growth
With over 82% of its combined weight allocated to the technology, communication services and consumer discretionary sectors, it is not surprising that the QQQ ETF is basically a growth fund. If an investor needs more convincing, consider this: nearly 61% of QQQ’s large-cap stocks are considered growth names compared to just 13% with a “value” designation.
The QQQ ETF’s positioning as a growth fund has been great news for investors during this bull market. When this bull market turned 10 years old, QQQ was up more than 606% over those 10 years compared to a gain of “just” 373.30% for the S&P 500.
It’s Highly Liquid
QQQ has robust on-screen liquidity, meaning its average daily volume is high. In fact, just four US-listed ETFs have larger average daily volume than QQQ’s 43.75 million.
Importantly, many of QQQ’s underlying holdings, such as Apple Inc. (NASDAQ:APPL) and Microsoft Corp. (NASDAQ:MSFT), are among the most heavily traded stocks in the U.S. That bolsters the QQQ ETF’s overall liquidity, keeping bid/ask spreads tight and total cost of ownership for investors favorable.
As noted earlier, QQQ devotes over 82% of its weight to just three sectors. Additionally, the QQQ ETF is a cap-weighted fund, so the likes of Microsoft, Apple and Amazon.com Inc. (NASDAQ:AMZN) command a massive percentage of QQQ’s holdings.
Those three stocks combine for about 30% of QQQ’s roster. Conversely, the top 10 holdings in the S&P 500 represent just about 22% of that index’s weight.
It’s Sort Of Volatile
The QQQ ETF’s long-term volatility is not off the charts, but investors should expect a fund that is more volatile than an S&P 500 tracking vehicle. Those are the breaks when a fund is overweight in tech stocks and has scant exposure to defensive sectors. Even QQQ’s healthcare holdings are predominantly biotech names, all but reducing the fund’s defensive exposure to a 5.86% weight in consumer staples.
From 2013 through 2018, QQQ was more volatile than the S&P 500 in each of those years with the narrowest gap in annualized volatility occurring in 2013 when the QQQ ETF was 110 basis points more volatile than the S&P 500.
Todd Shriber does not own any of the aforementioned securities.