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Weighing the Risks With the Invesco QQQ ETF

Todd Shriber

Widely known as the QQQ or the Nasdaq-100 tracking ETF, the Invesco QQQ (NASDAQ:QQQ) is home to over $60 billion in assets under management, making it one of the largest U.S.-listed exchange-traded funds (ETFs).

As of the end of 2018, just six ETFs trading in the U.S. were larger than QQQ, and the fund is largest ETF offered by Invesco (NYSE:IVZ), the fourth-largest U.S. ETF sponsor.

QQQ debuted in March 1999, making it somewhat old relative to a substantial portion of the ETF universe. It tracks the Nasdaq-100 Index. That index is significantly more allocated to technology stocks and less diverse at the sector level than traditional broad market benchmarks, such as the Russell 1000 Index or the S&P 500.

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The other side of that coin is that QQQ makes for a solid option for investors seeking increased technology exposure without the commitment of dedicated technology fund, such as the Technology Select Sector SPDR (NYSEARCA:XLK) or the Vanguard Information Technology ETF (NYSEARCA:VGT).

QQQ ETF: The Good and the Bad

QQQ is a cap-weighted ETF, meaning its 103 components are weighted by market capitalization, the methodology used by a significant percentage of equity ETFs. As a result of QQQ tracking the Nasdaq-100 Index, investors will not find large-cap technology stocks in this fund that trade on the New York Stock Exchange — for example, International Business Machines (NYSE:IBM) and Oracle (NYSE:ORCL) are not QQQ holdings.

As of Wednesday, QQQ’s weight to the technology sector was 41.42%, or more than double tech’s weight in the S&P 500. QQQ’s second-largest sector weight is 23.13% to the newly formed communication services sector. That is where Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) now reside. QQQ’s weight to that sector is also more than double the S&P 500’s.

Consumer discretionary is QQQ’s third-largest sector exposure at 16.64% with Amazon.com (NASDAQ:AMZN) accounting for 9.74% of the fund’s roster. So three sectors — technology, communication services and consumer discretionary — combine for over 81% of QQQ’s weight. Those points indicate QQQ lacks some of the sector diversity that often lures investors to broad market index funds. By comparison, the S&P 500’s top seven sector exposures would need to be combined to exceed the weight it devotes to its top three sector allocations.

There is another element of cconcern: single-security risk. Due to being a cap-weighted fund with a selection universe being confined to non-financial stocks trading on the Nasdaq, QQQ often features large weights to a small number of stocks.

Currently, Microsoft (NASDAQ:MSFT), Amazon and Apple (NASDAQ:AAPL) combine for about 30% of QQQ’s weight. The S&P 500’s top-10 holdings combine for approximately 21% of that index’s weight.

Concentration risk, whether be at the sector level, individual security level or both, can lead to increased volatility. While QQQ outperformed the S&P 500 by about 1,200 basis points over the past three years, the Invesco fund was almost 420 basis points more volatile than the benchmark U.S. equity gauge. During that period, QQQ’s maximum drawdown exceeded that of the S&P 500 by 350 basis points.

Going For Growth in the QQQ

Not surprisingly, this ETF is classified as a growth fund, since nearly 61% of its holdings are large-cap growth stocks. As investors learned during late 2018’s FAANG retrenchment and the slide experienced by Apple on Thursday, overweight exposure to technology and growth stocks is not a risk-free bet.

That said, QQQ remains a solid option for investors who know the risks associated with this vehicle. The provides clean, liquid exposure to some of the largest domestic technology and does so with a favorable fee of just 0.2% per year, or $20 on a $10,000 investment.

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.

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