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Nasdaq ETFs in Focus as the Index Touches 15-Year High - ETF News And Commentary

Zacks Equity Research

With U.S. economic growth at an 11-year high and job growth at the best phase since 1999, it makes sense to ride out the amazing growth momentum.  While several corners of the market are presently offering opportunities, a specific benchmark, Nasdaq, is expected to be on fire as we progress into 2015. This is the second-largest U.S. and global stock exchange by market cap and trading volume.

The index closed above the 5,000 mark for the first time in early March since the dot-com boom took the technology sector by storm in March 2000. This is especially true as the index is heavy on the technology sector. Investors should note that when the U.S. economy shifts gear from recession to recovery, economically sensitive sectors like Information Technology gains momentum. Per Fidelity, greater consumer optimism and a pickup in corporate spending normally boosts tech stocks and in turn reinforce the outlook of industries like semiconductors.

This is exactly what is happening in the current U.S. economic backdrop. The Zacks Earnings Trend shows that technology sector came up with an earnings beat ratio of 64.5% and revenue beat ratio of 48.4% in Q4. Tech earnings witnessed an about 13.5% jump in the quarter with an expected 7.2% rise in 2015 and 11.4% in 2016, as per the Zacks Earnings Trend (read: 3 IBM Proof Tech ETFs for 2015).

The story is much sweeter when it comes to revenue growth. We have seen tech stocks posting 7.9% expansion in Q4 of 2014 with an expected 5% rise in both 2015 and 2016. The performance was notably better than what we saw from the same group of companies in other recent quarters. Needless to say, this bullish tech outlook should have a palpable impact on Nasdaq (read: Nasdaq Hits 5,000 on Tech Mergers: Semiconductor ETFs Surge).  

In fact, the tech-laden Nasdaq Composite Index gained about 14% in 2014 which was the best performing market index of the year. Not only this, the index touched a 14-year high to close out the year too. No geo-political tension, oil price rout, deflationary worries in Europe, slowdown in the Chinese and Japanese economies came in the way of its north-bound march.     

While many are jittery about the stretched valuation and a ‘2000-style crash’ of Nasdaq, most experts are of opinion that these fears are unjustified. At least, a CNBC article gives such signal. Per the article, many Nasdaq bellwethers including Apple Inc (AAPL), Microsoft (MSFT), Amazon (AMZN), and Google (GOOG) are presently great revenue engines unlike 2000.


Moreover, Nasdaq’s 247% ascent in 2000 came in just seven months while the latest 295% climb took as many as six years, suggesting the boom this time is for real and is here to stay. For investors interested in riding out this uptrend in Nasdaq, we suggest three ETFs which track this key American tech-heavy index.


Notably, the relative strength index of the below-mentioned ETFs is hovering in the 42–45 range suggesting that these products are yet to enter the overbought territory and ready for further run.


PowerShares QQQ ETF (QQQ)


This is the largest and the most popular product in the large cap growth space holding 107 stocks in its basket. Its underlying index – the Nasdaq 100 – includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization (read: QQQ ETF in Focus as Nasdaq Announces Changes to the Index).


Apple dominates the fund with over 14% allocation, followed by Microsoft with 7.04% allocation. Apart from these two stocks, all the other individual securities have less than 4% exposure each in the fund. In terms of sector exposure, the fund is heavily concentrated on Information Technology with about 60% of assets invested. However, Consumer Discretionary and Health Care also get double-digit exposure in the ETF (see all Large Cap ETFs here).


The fund manages an asset base of $38.1 billion and trades in heavy volumes of 35 million shares a day. The product is one of the cheapest in its space charging 20 basis points as fees. The fund is up 2.4% so far this year (as of March 11, 2015) and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.


First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW)


QQEW looks to replicate the performance of the NASDAQ-100 Equal Weighted index. This benchmark index provides exposure mostly to the largest domestic, and to some extent, international companies holding each stock in an equal-weighted fashion. An equal-weighted approach also alleviates some company-specific concentration risks from the ETF.


The fund invests $583.8 million of assets in 107 stocks. No stock accounts for more than 1.31% of the basket. The fund appears to be heavily invested in the Technology sector with about 40% of investment, followed by about 29% in Consumer Services and 12% in Health Care.


The fund charges 60 bps in annual fees which is a bit higher than the average fee charged by the large-cap growth equities ETFs. QQEW has returned 1.63% year to date. The fund presently carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


Direxion NASDAQ-100 Equal Weighted Index Shares ETF (QQQE)


The fund also provides exposure to the NASDAQ-100 Equal Weighted TR Index.  QQQE charges 35 basis points as fees and manages an asset base of $69.1 million. No stock accounts for more than 1% of the fund. The fund is up 1.7% so far this year and has a Zacks ETF Rank #2 with a Medium risk outlook.


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