It’s a tale of two markets right now. If you are an investor in blue -chip stocks, things are going great. The S&P 500 just hit new all-time highs. On the other hand, if you invest in growth-centered companies, it’s been a painful run. In the middle of these crosscurrents, we find the tech-heavy Nasdaq composite. The Nasdaq is represented here by the Invesco QQQ ETF (NASDAQ:QQQ) stock.
The Invesco QQQ exchange-traded-fund (ETF) invests in the 100 largest companies on the Nasdaq, which are primarily in the tech sector. Its top holdings are classic tech titan names such as Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), and Facebook (NASDAQ:FB).
QQQ: Facing a Mixed Environment
The Nasdaq finds itself in a complicated position right now. The FAANG stocks such as Apple and Facebook are solid blue chips that are trading at reasonable valuations. You can argue over whether they’re good buys or not, but they’re certainly not in bubble territory.
On the other hand, in other parts of the Nasdaq, you have stocks that are far less solid valuations. And AMD, for example, is selling at 10x sales and 37x earnings. That’s even as its earnings are far above its historical average and may be in for a large reversion to the mean.
And it’s not like AMD is a high-margin software company; rather it competes in a brutally competitive semiconductor industry against better-financed peers. All that to say that AMD is the sort of stock that could easily drop 50% in a major market correction.
Or take a Tesla (NASDAQ:TSLA), a major Nasdaq holding, which is selling at 31x revenues and 982x trailing earnings. And that’s after the stock has lost a third of its value from its recent highs.
When you add up all the QQQ holdings, however, it tips much more heavily toward the high-quality FAANG names than the more speculative pure growth plays. This gives investors some resiliency in rocky markets, such as what we have right now.
Much Different Than ARK
When you think of tech and growth stocks, you might think of something like Cathie Wood’s Ark Innovation (NYSEARCA:ARKK) fund. That thing has had scorching returns up until recently, and is invested heavily in cutting-edge tech companies. If you want an ETF that lives and dies by next-generation technology, a product like Ark makes sense.
However, to be clear, that’s actually not what the Nasdaq or QQQ stock is. At this point, the big Nasdaq names such as the FAANG companies have become the behemoths of the economy. Apple is the world’s largest consumer products company. Alphabet’s Google (NASDAQ:GOOG, NASDAQ:GOOGL) essentially replaced a huge chunk of the legacy media and advertising industry. And so on.
That’s much different than something like Ark, where it has huge, concentrated positions in much smaller companies. We’ve seen this play out in practice. On several days during the recent tech correction, the ARKK ETF has gone up when QQQ stock has gone down and vice versa. QQQ, by contrast to ARKK or Direxion Moonshot Innovators (NYSEARCA:MOON) is focused primarily in safer blue-chip tech stocks. The returns show this difference. Since February, ARKK has fallen roughly 25% from its recent highs, while QQQ is down less than 10%.
QQQ Stock Verdict
As far as tech ETFs go, QQQ is a great pick. For one thing, it has a very low management fee. Currently, it charges just 0.2% per year, meaning that it costs only $20 to own $10,000 of QQQ stock for a year. That’s a highly reasonable price for access to 100 of the country’s leading Nasdaq stocks.
In addition, QQQ is extremely liquid. That means that it’s easy to trade, has high volume, and has excellent spreads on QQQ options for hedging as well. This is a great investment product as far as its technical aspects go.
I would only point out, however, that it’s heavily tilted to the FAANG stocks such as Amazon and Apple. If you’re looking for a high-risk high-reward moonshot-type ETF, QQQ isn’t quite the right fit.
However, for clean quick access to the country’s biggest tech companies, QQQ works well. And as we’re seeing during this current correction, QQQ stock holds up fairly well even when many tech stocks are getting walloped.
At the time of this writing, Ian Bezek held a long position in FB stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.