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In this episode of ETF Spotlight, I talked with John Frank, QQQ equity product strategist at Invesco. We discussed the Invesco QQQ ETF (QQQ, which is based on the Nasdaq-100 Index.
The Nasdaq-100 index is made up of 100 largest non-financial companies listed on the Nasdaq. While most investors think of QQQ as a tech-focused ETF, it actually is more of a large-cap growth fund, holding many highly innovative and strong companies in other sectors too.
John explained how stocks are included and weighted in the index. We also discussed how modified cap weighting with two safeguards ensures that the index is well diversified.
Invesco QQQ is one of the top performing ETFs of the nine-year bull run; it significantly outperformed other large-cap growth ETFs. We discussed what contributed to this outperformance.
Through its heavy weighting in technology, John added that QQQ provides exposure that delivered higher returns than sectors in other growth indexes.
Investors love the FAANGs, comprising Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX ) and Google’s parent–Alphabet (GOOGL) for their stellar growth. FAANGs currently account for almost 40% of weighing in this portfolio.
Their soaring share prices have resulted in stretched valuations in some cases. The ETF is currently trading at ~20% premium to the S&P 500 Index, as a multiple of forward earnings.
As earnings growth is expected to slow down in the coming quarters, many market darlings included in the index would look much more expensive. Would that make them less attractive to some investors?
John pointed out that historically the Nasdaq-100 has traded at about 30% premium to the broader market and the current valuation actually looks attractive on a relative basis. Investors love these companies due to their phenomenal growth!
QQQ provides exposure to many companies developing and implementing disruptive technologies that are changing our world, like self-driving cars, artificial intelligence, cloud computing and blockchain.
