If you’ve ever had one or two more drinks than you planned on, you’re more than aware of what happens when the beer munchies take over. You’ll throw down some wings and fries, sure … but the nachos will suddenly sound good. So will the steamed shrimp. Fried Oreos don’t sound that bad, either.
Before you know it, you’ve got a weird mess of good things that you wouldn’t have thought to throw together, but it somehow works.
That’s what you have in the PowerShares QQQ Trust exchange-traded fund (ticker: QQQ).
The QQQ is a broad-market index fund (kind of). The PowerShares QQQ Trust tracks the Nasdaq-100 index, a subset of the broader Nasdaq composite that’s comprised of “100 of the largest domestic and international nonfinancial companies listed on the Nasdaq stock market based on market capitalization.”
Already, you get an exception. It’s a somewhat broad index fund … that excludes financials.
So, what all do you get in this fund? Well, as of this month …
— Information technology: 55.11 percent
— Consumer discretionary: 20.25 percent
— Health care: 14.46 percent
— Consumer staples: 7.44 percent
— Industrials: 2.06 percent
— Telecommunication services: 0.67 percent
The QQQ is massively overweight in tech, but it’s also not tech-heavy enough to be considered a tech fund. It’s a drunken bar food order if you’ve ever seen one, but there’s reason behind the madness. David Fabian, managing partner and chief operations officer of FMD Capital Management in Irvine, California, explains:
“Whether by design or practical experience, this index and its affiliated ETF have always been associated with the technology sector,” he says. “The truth is that many tech stocks have historically picked the Nasdaq exchange as their home base. Because QQQ culls its underlying holdings from this pool, there is a natural tendency to be overweight in the cream of the crop in tech stocks.”
That much can’t be argued. The QQQ’s top holdings are a who’s who of blue-chip tech royalty, including Apple (AAPL), Microsoft Corp. (MSFT), Amazon.com (AMZN), Alphabet (ticker: GOOGL, GOOG) and Facebook (ticker: FB).
And that top-heavy exposure, as it turns out, is what sets the QQQ apart.
“Back in the early 1980s, you would have made a tidy sum if you invested in Intel or Microsoft,” says Tom Taulli, founder of OptionExercise.com and editor of the IPO Playbook at Investorplace.com. “But what if you instead invested in the many other operators in the industry? The results probably would have been fairly dismal. Technology has a graveyard of many defunct companies. I like the QQQ ETF because it provides exposure to the growth categories like tech and biotech, with a focus on the quality companies.”
It’s not great in theory alone. The QQQ’s Arnold Palmer mix of half tech, half everything else has put it head and shoulders against not just the broader market, but also funds that are much more focused in technology.
| Since Inception (3/10/99) | 10-Year | 5-Year | 2-Year | YTD | |
|---|---|---|---|---|---|
| QQQ | 136.11% | 203.32% | 120.86% | 33.22% | 5.33% |
| SPY | 112.21% | 110.94% | 89.99% | 20.05% | 0.30% |
| XLK | 43.51% | 141.39% | 90.01% | 30.08% | 3.16% |
| Figures through 10/19/15 |
Looking ahead. Naturally, the question that matters most to new money is whether the QQQ is destined for more outperformance down the road. QQQ has not been driven by tech alone. Biotechs such as Gilead Sciences (GILD) and even consumer stocks such as Starbucks Corp. (SBUX) have propelled the fund ahead.
And naturally, the answer depends on who you talk to.
“The QQQ has benefited from the strength of biotech and big tech stocks over the last three years, launching into a nice run of relative outperformance against the mega-caps of the Dow Jones industrial average since 2013,” says Anthony Mirhaydari, founder of the Edge and the Edge Pro investment advisory newsletters. However, he cautions investors that a shift toward other areas of the market — energy, materials and industrials — could blunt the QQQ’s advantage.
“With political pressure building against drug prices and the bloom off of Apple, the reversal of fortune may well continue,” he says.
However, it’s worth pointing out that the QQQ’s focus on established, quality tech companies isn’t going anywhere, and the world’s increased dependence on technology is a trend that’s not going anywhere either. And while biotechnology firms have run into some short-term headwinds, a huge mega-trend of aging boomers, as well as humanity’s general interest in extending the clock, bodes well for the world’s large drug makers and biotechs.
Fabian likes this cheap fund (0.2 percent in expenses, or $20 for every $10,000 invested annually) not just for its investing themes, but also its versatility, saying it “straddles the line between a low-cost core index fund and a more nuanced tactical position, which makes it a versatile fund for a variety of investor profiles.” Fabian says you can simply buy and hold it if you’re OK dealing with a little volatility, or you can use it for short-term momentum trades.
So, yes, the QQQ isn’t exactly your garden-variety index fund. But like a jalapeno burger with a side of pierogi … well, it just works.
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Why the QQQ ETF Is a Hot Mess originally appeared on usnews.com
