Nasdaq-related ETFs outperformed the S&P 500 Index last year during its heady surge and are currently outperforming the S&P year-to-date, giving investors options even at a time when the index is flirting with record highs.
Going forward, ETFs invested in the tech sector—specifically information technology companies—are set to rise higher. Still, investors would be wise to look closely at different tech ETFs. Specifically, although broad-based funds focused on larger companies are besting the S&P, they’re returning less than funds focused on small- and midcap tech names.
“We have cyclical bias, and info tech is one of the favored sectors for us,” said Todd Rosenbluth, director of ETF/mutual fund research at S&P Capital IQ. His firm’s cherry-picking of the tech sector comes after the S&P 500 gained more than 30 percent in 2013 and reached new highs earlier this month.
“We think IT sector companies have very strong balance sheets that increasingly will be used to pursue value-added R&D, M&A, buybacks, dividends and debt retirement. Further, from a price-to-earnings growth basis, the sector looks undervalued to us,” he added.
Chart courtesy of StockCharts.com
IT is the biggest sector holding for the $45 billion PowerShares QQQ ETF (QQQ | A-55) at nearly 57 percent.
QQQ, which tracks a modified market-cap-weighted index of 100 Nasdaq-listed stocks, has Apple, Google and Microsoft as its top holdings, in that order. Apple makes up 11.6 percent of the portfolio, with Google and Microsoft making up 8.0 percent and 7.8 percent, respectively.
More generally, the fund has a majority of its weighting toward large-cap growth stocks.
The fund is up 2.1 percent year-to-date after returning 36.6 percent last year. It has an annual expense ratio of 0.20 percent, or $20 for every $10,000 invested.
Equal-Weighting The Nasdaq-100
Alternatively, two equal-eight Nasdaq ETFs, including the $528 million First Trust Nasdaq-100 Equal Weighted Index Fund (QQEW | B-53) and the $30 million Direxion Nasdaq-100 Equal Weighted Index Shares ETF (QQQE | C-54) allocate equally to smaller companies and, comparing performances, the equal-weight methodology has been outperforming the market-cap methodology.
Equal weighting tilts a portfolio to smaller higher-beta companies, which typically means quicker moves higher in rising markets and quicker moves downward when markets turn bearish.
Both equal-weighted ETFs’ current top three holdings include Tesla Motors; the biotech concern Illumina Inc.; and the coffee maker Keurig Green Mountain. QQEW is up 4.6 percent year-to-date after returning 39.9 percent last year, and has an annual expense ratio of 0.60 percent, or $60 for every $10,000 invested.
QQQE is cheaper than the more established QQEW, charging 0.35 percent, or $35 for every $10,000 invested per year, and is also outperforming QQQ, up 4.8 percent year-to-date after returning 43.2 percent last year. But the fund currently has a high closure risk because of its low assets, according to an ETF.com analyst report.
Another equal-weighted ETF, the $97 million First Trust Nasdaq-100 Ex-Technology Sector Index Fund (QQXT | B-47), also has exposure to Tesla, Illumina and Keurig, and is up 4.1 percent year-to-date after returning 41.6 percent last year.
However, Rosenbluth noted that if the overall market experiences volatility and has more modest growth in 2014—which his firm is expecting—then large-cap stocks will perform better than small and midcaps because of the relative stability of larger companies compared with riskier smaller counterparts.