The PowerShares QQQ Trust Series 1 (O:QQQ) is based on the NASDAQ-100 Index, which measures the 100 largest non-financial stocks currently trading on the NASDAQ exchange. Whether by design or practical experience, this index and its affiliated ETF have always been associated with the technology sector.
The truth is that many technology companies 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 the cream of the crop in the technology field.
However, when you dig beneath the surface, this unique group of stocks actually offers far more than just a one-dimensional focus. Over the years, QQQ has evolved to include a broader depth of sector dispersion as market dynamics, M&A activity, and other growing trends have taken hold.
Understanding its nuances can unveil attractive characteristics for investors looking to capitalize on a diversified array of top growth stocks.
Today’s QQQ
The current sector makeup of QQQ is 55% technology, 20% consumer discretionary, 14% healthcare, 7% consumer staples, and a small fraction in industrials. Top holdings in this ETF include: Apple Inc (O:AAPL), Microsoft Corp (O:MSFT), and Amazon.com Inc (O:AMZN). Together these three stocks make up over 25% of the total portfolio, with AAPL garnering 12.65% of the overall weight.
Fun fact: According to Wikipedia, AAPL is one of only four original components of the NASDAQ-100 Index since its debut in 1985. The other three are Costco Wholesale Corp (O:COST), Intel Corp (O:INTC), and PACCAR Inc (O:PCAR).
Many of the top stocks in QQQ can be found in specialized sector funds such as the Technology Select Sector SPDR (N:XLK). However, the real value in this index is its diversification into other realms such as biotechnology, social media, e-commerce, and other consumer-driven themes. Health care in particular has been a strong momentum area of the market over the last several years and continues to be a performance differentiator for QQQ.
In addition, the underlying holdings in this ETF are not solely U.S.-based stocks. Many publicly traded international companies such as Baidu Inc (O:BIDU) and Jd.Com Inc Adr (O:JD) are represented in the index as well. This broader diversification has prompted QQQ to become one of the top baskets that market experts monitor on a daily basis.
To date, this juggernaut has accumulated $39 billion in total assets and charges an expense ratio of 0.20%. While the QQQ expense ratio is slightly higher than an equivalent S&P 500 Index fund, the embedded cost is still in a reasonable realm for a market-cap weighted ETF.
How To Use This ETF
An ETF like QQQ has many uses within the context of a diversified portfolio. 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.
More aggressive investors with a long-term mindset may be apt to view this ETF has a core holding from which they can own top companies across a variety of growth-oriented themes. This should come with the implicit understanding that QQQ will likely experience periods of heighted volatility versus ETFs that have greater emphasis on defensive areas of the market.
On the flip side, this fund can also be used by active investors to tactically overweight a smaller portion of their portfolio towards high momentum stocks. This may include taking advantage of a short-term trading opportunity or simply finding value in the sectors that make up this unique index.
Whatever your reason may be for owning this ETF, it should be noted that the underlying holdings are evaluated on an annual basis to stay in line with the index methodology. Stocks that have shrunk in market cap size may be eliminated and others will ultimately take their place. In addition, automatic rebalancing will impact the distribution of assets among the individual stocks in the portfolio.
My advice is to thoroughly research these factors and create a sound game plan before implementing this ETF in your own account.
Disclosure : FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this article. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.