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Top Ranked NASDAQ ETF in Focus: QQEW

Zacks Equity Research

After a sluggish start to 2014 following a slew of weak data points, the U.S. markets once again gained momentum on better labor market data, comforting earnings picture with more companies beating top and bottom line estimates thanks to easier comps, improved new home sales data and easing geopolitical tension between Russia and Ukraine. The S&P 500 index and the NASDAQ are presently hovering around multi-year highs.  

In fact, weather-related distortions justified whatever poor economic data the market has delivered so far. Investors have apparently decided to attribute the weak ADP and service sector ISM surveys, ticked down GDP growth estimate for 2013 Q4, and most lower-than-expected data for 2014 Q1 to severe winter.

And the stock markets seem largely unruffled by this recent softness. Further, the axe on QE stimulus is also giving cues of sustained economic recovery (read: Play the Market Rally with These ETFs).

Not only this, optimism is also slowly building up on other developed regions like Europe and Japan. European new-car sales expanded for the fifth successive month in January, indicating continued revival in the region. Investors should note that auto sales are a prime indicator of consumers’ purchasing power (read: Another Europe ETF on the Horizon from iShares?).

Even in its recent policy meeting, the European Central Bank stayed on track with the ongoing policy measure. No urgent need for policy easing in the wake of the recent improvement in the region’s growth and inflation pictures also hints at the bullishness in the Euro zone. Things are also shaping up well in some emerging and frontier markets.

Best Investment Option

In such an economic backdrop, large caps stocks – with wide global exposure – should be considered as an investment avenue in 2014. Notably, most U.S. large caps are presently attractively valued as compared to a good number of small-caps which had a spectacular run last year. 

Among the large-cap set, style-wise, growth investing might earn investors considerable returns. Growth investing is basically a momentum play, which makes it a great strategy in a trending market (i.e. a market characterized by a prolonged uptrend). 

However, growth stocks and the resultant ETFs exhibit a higher degree of volatility especially compared to value stocks. Also, the market is likely to witness volatility in the coming weeks on a possibly faster QE tapering.

Additionally, the upcoming mid-term elections in November 2014 can result in considerable volatility and market correction. That is why it is recommended to play the growth momentum of the U.S. market with a focus on large-caps, as these are generally less volatile.

Thus, a look at the top ranked large-cap growth ETF could be a good idea to ride on this optimism, especially based on our Zacks ETF ranking system.

About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class.
The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).
For investors seeking to apply this methodology to their portfolio in the large cap growth sector, we have taken a closer look at the top ranked QQEW, which has a Zacks ETF Rank of 1 or Strong Buy with a ‘medium risk’ level. The details are highlighted below (see all the Large Cap ETFs here).
First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW)

Launched in April 2006, 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 $535.6 million of assets in 101 stocks. Top companies include Tesla Motors (TSLA), Illumina (ILMN), Green Mountain Coffee Roasters (GMCR) with a combined share of 4.37%. No stock accounts for more than 1.60% of the basket.

QQEW appears to be heavily invested in the Technology sector with 40.40% of investment, followed by 26.88% in Consumer Services and 13.19% in Health Care. Notably, technology was the second best performing sector in terms of beat ratios last earnings season, as per the Zacks earnings trend (read: Top Ranked Technology ETF in Focus: QTEC).

The fund charges 60 bps in annual fees which is a bit higher than the average fees charged by the large-cap growth equities ETFs. QQEW gained 5.66% year to date against 1.93% gains in SPDR S&P 500 ETF (SPY). The fund presently carries a Zacks ETF Rank # 1 (Strong Buy) with ‘medium’ risk outlook.

Bottom Line

QQEW is extremely vulnerable to tech stocks. Notably, technology saw improved earnings and revenue growth rates as well as beat ratios in fourth-quarter 2013 relative to many other sectors and the stellar performance is expected to continue in 2014 and 2015.

The fund’s second and third sector holdings, Consumer Discretionary and Healthcare, also call for substantial growth this year and in the next, thus making QQEW a wise bet for investors seeking a top ranked large cap focused fund for 2014.

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Zacks Investment Research

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