Investors looking to own stocks in the technology sector may decide to buy Exchange Traded Funds (ETFs) that track the Nasdaq. When investors refer to the Nasdaq, they are usually referring to the technology-heavy Nasdaq Composite Index, which is made up of more than 2,500 companies. Companies in this group vary widely in size and quality, including struggling young companies and dominant, established companies.
The Nasdaq 100 Index is another way for investors to track the broader Nasdaq Composite effectively. The Nasdaq 100 tracks the 100 largest non-financial companies listed on the Nasdaq exchange, weighted according to an adjusted market capitalization strategy. The index is made up of a wide variety of companies, including the world’s largest technology stocks, as well as retail, biotechnology, industrial and healthcare stocks. The Nasdaq 100 also includes companies such as video game maker Activision Blizzard Inc. (ATVI) and soft drink maker PepsiCo Inc. (PEP). Investors looking to diversify their investments and reduce risk should consider ETFs targeting the Nasdaq 100.
Key learning points
- The Nasdaq 100 is an index of 100 of the largest non-financial companies listed on the Nasdaq stock exchange.
- The Nasdaq 100 underperformed the broader market over the past year.
- The two ETFs that meaningfully target the Nasdaq 100 are QQQ and QQQM.
- The top three of both ETFs are Apple Inc., Microsoft Corp. and Amazon.com Inc.
There are only two ETFs traded in the US that meaningfully target the Nasdaq 100, the Invesco QQQ (QQQ) and the Invesco Nasdaq 100 ETF (QQQM). The Nasdaq 100 Index underperformed the broader market over the past year. On August 27, 2021, the Nasdaq 100 delivered a total return of 30.3% over the past 12 months, just below the total return of 31.4% of the S&P 500. Below we take a closer look at both the QQQ and the QQQM. All data below is as of August 27, 2021.
- 1 year performance: 29.9%
- Cost ratio: 0.20%
- Annual dividend yield: 0.47%
- Average daily volume over 3 months: 34,603,012
- Assets under management: $188.5 billion
- Founding date: March 10, 1999
- Publisher: Invesco
QQQ has become one of the most popular ETFs. The sheer magnitude of the daily trading volume suggests that it is generally preferred as a vehicle for short-term trading as opposed to long-term investments. The high liquidity makes frequent trading relatively cheap. But that doesn’t rule out its usefulness for tactical exposure to the technology sector within a buy-and-hold strategy. The fund has one of the lowest expense ratios in the industry, making annual fees relatively inexpensive for the long-term investor. QQQ is also not the most diversified ETF, as it only owns non-financial companies and is heavily weighted to just a handful. About 49.1% of its holdings are in the information technology sector, followed by 19.6% in communications services and 16.3% in consumer durables.
- Performance over 1 year: N/A
- Expense ratio: 0.15%
- Annual dividend yield: 0.36%
- Average daily volume over 3 months: 194,755
- Assets under management: $1.7 billion
- Effective Date: October 13, 2020
- Publisher: Invesco
QQQM, a slightly cheaper version of QQQ, was launched by Invesco in October 2020. This newer “Q-mini” fund is almost identical to QQQ. Like its older counterpart, it also tracks the Nasdaq 100. However, it has lower fees, a smaller share price and reinvests dividends, all of which can be more attractive to savers who buy and hold. We should note that the combination of the traditional QQQ of larger size and greater liquidity makes it a relatively cheaper option for many large institutional investors and fast trading firms. Because the Q-mini is so new, it doesn’t have a full year of performance data yet. Below we list the top 10 positions, which are the same for the traditional QQQ.
|Top QQQ and QQQM Holdings|
|Company name (ticker)||Percentage of Total Assets||Description of the company|
|Apple Inc. (AAPL)||11.1%||Computers, software, services|
|Microsoft Corp. (MSFT)||10.1%||Computers, cloud services, software|
|Amazon.com Inc. (AMZN)||7.6%||Ecommerce, Cloud Computing|
|Alphabet Inc. (GOOG) (Class C Shares)||4.2%||Search engine, software and cloud computing|
|Facebook Inc. (FB) (Class A Shares)||4.0%||Social media|
|Alphabet Inc. (GOOGL) (Class A Shares)||3.9%||Software, search engine and cloud computing|
|NVIDIA Corp. (NVDA)||3.9%||Computers and chips|
|Tesla Inc. (TSLA)||3.8%||Electric vehicles|
|PayPal Holdings Inc. (PYPL)||2.2%||Online payments|
|Adobe Inc. (ADBE)||2.2%||Software for publishers and creators|
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