A Coronavirus Quagmire for the QQQ ETF

The novel coronavirus situation may be improving, or at the very least, getting less worse in China, but the opposite is true in the U.S. Combine that with the Federal Reserve’s recent interest rate cut – an impotent move that wreaks of panic – and plunging oil prices, and there’s a perfect storm to explain the recent selling pressure in domestic stocks.

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That gets us to the battlefield that is the Invesco QQQ ETF (NASDAQ:QQQ). I don’t want to be hasty in saying current market conditions are a bear market or recessionary, though we’re inching closer to the former. With that in mind, history shows us that many bear markets start on the back of the previous bull market’s leaders.

In this that would be growth stocks and technology. As it pertains to the QQQ ETF, that’s relevant because the fund is classified as a large-cap growth fund and allocates 47% of its weight to the technology sector.

And while the QQQ ETF, which tracks the Nasdaq-100 Index, is considered a broad market fund, it’s significantly different than, say, S&P 500 or Russell 1000 tracking products. Moving past the obvious of QQQ holding just 103 stocks compared to over 500 for a product like the SPDR S&P 500 ETF (NYSEARCA:SPY), there is volatility.

Over the past three years, average annualized volatility on QQQ has been 19% compared to 14.9% on SPY. In a bull market, the trade off is worth it, because over that time, QQQ more than doubled the returns of SPY.

Probably a Buying Opportunity

The $87.74 billion QQQ debuted in March 1999, so it was around during the tech wreck of 2000. QQQ is far better-positioned today to deal with market retreats than it was back then.

Many QQQ components fit the bill as high quality stocks, including Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). That quartet combines for over 39% of QQQ’s weight.

These are cash-rich companies with dominant market positions. No, that doesn’t mean QQQ is immune from market pullbacks, but it does make an investor think twice about ignoring this fund outright while macro issues grip the market.

As of last November, those four companies had over $400.2 billion in combined cash reserves. Including those four, only six S&P 500 companies have larger market values than that cash hoard.

Another issue to consider is valuation. At 25.52x earnings, QQQ is pricey relative to a broader universe of domestic large-caps. And heading into this year, there were plenty of concerns about the multiples being sported by Amazon, Apple, and Microsoft. However, high multiples and prices aren’t necessarily harbingers of crashes.

“High prices aren’t actually a great predictor of quick and devastating crashes,” said Harvard Business School Professor Robin Greenwood. “If you look at periods where we’ve had these crashes — 1987, for example … or all sorts of events that we’ve had over the past couple of decades — they seem to happen whether or not the market has risen a lot or not.”

Bottom Line on QQQ

Recent market action suggests calling a bottom is becoming increasingly difficult, if not foolhardy. But somewhat quietly, QQQ has been 240 basis points better than SPY this month. That doesn’t mean a turnaround is imminent, but it could be a sign that when one materializes, QQQ and some of the aforementioned stocks will lead, not lag.

Additionally, many of QQQ’s largest holdings are catalyst-rich names over the course of 2020. Whether it be 5G iPhones with Apple, the growth of cloud computing with Amazon and Microsoft, the video game hardware upgrade cycle (Microsoft) and much more, there are more stories to be told with QQQ, potentially indicating the current state of affairs with the ETF won’t last throughout this year.

As of this writing, Todd Shriber did not own any of the aforementioned securities. He has been an InvestorPlace contributor since 2014.

Article printed from InvestorPlace Media, https://investorplace.com/2020/03/qqq-is-getting-pinched-by-coronavirus-but-its-worth-a-look/.

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