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FANG Flaws Weigh on ‘QQQ’ ETF

This article was originally published on ETFTrends.com.

The Invesco QQQ (QQQ) , which tracks the tech-heavy Nasdaq-100 Index, is off nearly 11% in the fourth quarter and erosion in the FANG trade is a major reason why QQQ is struggling.

Investors have been spooked by copious amounts of volatility after a decade-long bull run that has seen the growth fueled by FANG stocks dwindle as the technology sector fell into correction territory.

“The current bull market has provided strong returns over an extended period, but it has been the small group of FANG stocks that has captivated investors, achieving great notoriety in the last decade,” said Invesco in a recent note. “While the S&P 500 Index has recorded annualized returns of 11.1% over the past five years, the FANG stocks have returned an average of 26.9% per year over this period.”

Amazon.com Inc. (AMZN) , Alphabet Inc. (GOOG), Facebook Inc. (FB) and Netflix (NFLX) combine for about a quarter of QQQ's weight.

Understanding The Correction

A variety of reasons can be cited for triggering the recent FANG correction and some market observers believe not all of those reasons are company-specific.

“It’s difficult to pinpoint any company-specific reasons for the recent correction. The blame can likely be shared by concerns around tariffs, tighter monetary policy and a mixed earnings season,” said Invesco. “Whether the recent downturn will be a short-lived correction or the beginning of a more damaging bear market is yet to be seen. Keep in mind that while earnings have continued to rise, year-over-year growth estimates are slowing. This is a key point to consider —  over the past five years more tech-heavy indexes, such as the Nasdaq-100 Index, have been able to outperform the S&P 500 Index thanks in part to the ability of growth companies to surprise analysts on the upside.”

FANG stocks and related fare offer rebound potential in 2019.

“Continually beating expectations is a tall order for any company. However, given the very negative sentiment (and increased volatility) that has recently developed in response to geopolitical and economic events, it is possible that expectations may have been ratcheted down too much. With the earnings power of the FANG+ stocks still relatively attractive, in my view, we may see continued strength in 2019,” according to Invesco.

Bearish traders can prepare for a possible decline in the Nasdaq-100 with the ProShares UltraShort QQQ (QID). QID attempts to provide double the daily inverse returns of the Nasdaq-100 Index.

For more news and strategy on the Technology market, visit our Technology category.

Tom Lydon’s clients own shares of QQQ, Apple, Facebook and Microsoft.

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