While the S&P 500, Dow Jones and Russell 2000 were busy making new highs, the Nasdaq was left behind. The Invesco QQQ ETF (NASDAQ:QQQ) was getting hit as tech stocks were roughed up. QQQ stock lagged as a result, but you can’t keep this group down forever.
Think of it like a basketball in the water. You can pull it below the surface for brief periods. You can even really drive it down if you try. But after a while, it rockets back to the surface and breaks back above the water.
That’s sort of like QQQ stock. It can lag the broader market at times and can even see bigger losses than the general market during a correction. However, this exchange-traded fund is a leader and it can only be held back for so long.
From Laggard to Leader?
The QQQ ETF has lagged behind its peers, as the Nasdaq has lagged the other indices. That’s largely to blame on two things, though.
First, while growth stocks roared higher to start the year, this group went on a painful slump. Unfortunately, that happens with growth stocks. These names run long and far — oftentimes doubling or tripling along the way — then suffer 30% to 50% pullbacks.
It’s just the nature of the growth-investing game. However, more times than not, these pullbacks tend to be buying opportunities.
The second reason QQQ stock underperformed? FAANG.
While FAANG is a notable component in other indices too, the group doesn’t have as heavy of a weighting as it does in the QQQ. This group — and large-cap tech stocks in general — have been consolidating for months.
Although sideways price action doesn’t negatively impact the QQQ ETF necessarily, it doesn’t help it. At a time where high-growth stocks are under pressure, the QQQ desperately needed FAANG and other large-cap tech stocks to bail it out.
When they couldn’t, the Nasdaq and the QQQ were susceptible to larger declines.
However, we’re getting a nice rally in high-growth stocks as the group tries to bottom. FAANG and other mega-cap tech stocks have turned around too. Several are hitting new all-time highs. Those that haven’t are trading better too.
Perhaps investors are rotating out of value stocks and looking for more growth. Maybe they feel this group is too cheap. Or perhaps it’s investors getting bullish ahead of earnings.
Whatever the reason, it doesn’t matter. It bodes well for QQQ stock as the Nasdaq and tech make a comeback. Now let’s see if it can make new highs.
QQQ Stock vs. Its Peers
The market has a way of ebbing and flowing. But regardless of how those ebbs and flows go, the QQQ isn’t not something that should be neglected. For starters, despite its recent underperformance, it tends to be a big-time out-performer.
Up 67% in the past 12 months, the QQQ trounces the S&P 500’s 47% gain (although that’s still respectable).
Over the last three and five-year periods, the outperformance grows. The QQQ is up 114% and 207% in that stretch, while the S&P 500 is up 57% and 100%, respectively.
We’re not here to beat up on the S&P 500. In fact, I like the index and feel that having exposure to that group of stocks is a good thing. However, the QQQ simply provides more “oomph” for investors.
Others will critique it as risk vs. reward, that in order to get those big returns, investors must accept higher risk. They argue that the QQQ is a riskier holding than the S&P 500. But is it? Amid the novel coronavirus correction of 2020, QQQ stock sank 30.55%, while the S&P 500 fell 35.4%.
Granted, that’s just one data point. However, it shows that the QQQ’s exposure to some of the market’s strongest companies and brands didn’t leave it overexposed and at risk, it insulated it to some degree against the broader market’s decline. In other words, it’s weighing was an asset, not a liability.
I love that investors can add or subtract tech exposure in a pretty quick manner with the QQQ as well. The fact that it’s not a risky volatile asset in down times, yet outperforms on the upside means it’s a holding every investor should consider.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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