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Kristal Insights6 Mins Read

Own A Slice of Top Technology Brands with Invesco QQQ ETF

How often has it been said, we live in a technology world.

WhatsApp for work and family connection. Smartwatches for on-the-go notifications. Amazon for shopping while commuting to your next destination. The average Indian they say has around 51 apps installed on their phones – an apt number for a country with 451 million monthly active internet users at the end of 2019 (second only to China).

So, what if we told you that you could own a share in these technologies and brands you love? That the technology world we live in right now also offers ways for the end-user – you and me – to invest in the same universe and become a part of its growth.

QQQ ETF | INVESCO QQQ Trust – the ETF of choice for new-age investors who want to be a part of the growth story of the top sectors and companies across the globe.

But I know you won’t invest in something just because I tell you to. Which is more than fair – so let me break this down for you and introduce you to the most popular and well-loved exchange traded fund there is.

But first, a little history

In 1971, the stock market changed for the good with the introduction of the NASDAQ. Created by the National Association of Securities Dealers, the electronic stock market helped investors trade securities online for the first time ever.

The NASDAQ Composite (ticker symbol ^IXIC) is the index that tracks the NASDAQ stocks. Along with the Dow Jones Industrial Average and S&P 500, it is one of the three most-followed indices in US stock markets. It is only the second-largest in the world behind the NYSE (New York Stock Exchange)!

The NASDAQ Composite lists over 3,000 stocks. A subset of this is the NASDAQ 100 index composed of the top 100 brands listed on the stock exchange. This is the hero of our story.

A bit about the NASDAQ 100 index

Started in the year 1985, the NASDAQ 100 index is a weighted capitalization index that tracks the top non-financial companies listed on the NASDAQ. The NASDAQ-100 (NDX) is the world’s most widely followed index for large-cap stocks.

Here’s what the terminologies mean:

  • Index: In investing, an index is a ruler, or tracker, of the movement of a stock’s performance. If you want to read more about how an index works, please read this article from The Balance.
  • Large-cap stocks: Stocks of companies with market capitalization or market value of more than $5 million.
  • Weighted-capitalization: An index using weighted capitalization gives more weight to the companies with higher market capitalization. A weighted index calculates the total market value of a firm by multiplying the outstanding shares by the current price of a single share.

NASDAQ 100 over the years

In the fifteen years, from December 2003-2018, companies listed on the NASDAQ 100 registered a compounded annual growth rate of 13% in revenue,  22% in earnings, and 29% in dividends paid.

An average Nasdaq-100 company spends an average of $1.7 billion per year on research and development, which is double the average spent by an S&P 500 company. NASDAQ-100 companies are known to be at the forefront of innovation given how the index is weighted towards the technology sector.

Think of the big names defining innovation and tech in today’s era. Tesla with its Cybertruck? On NASDAQ-100. Apple and the iPhone fever? Temperature checks are available on the NDX. Amazon, Netflix, Microsoft, Facebook – the big guys have all called the NASDAQ-100 index home for a while now.

So, if you’re sold on the NASDAQ-100 index, I’m sure you’re wondering about the same thing that every good investor wonders about – how does one invest in this index?

Hi! My name is ‘Cubes’

One of the oldest and most popular means to invest in the NASDAQ-100 is the Invesco QQQ Trust (QQQ ETF). Widely known as “The Cubes”,  the Invesco QQQ Trust ETF celebrated its twentieth anniversary recently. What’s more? This ETF is the second-most actively traded Exchange Traded Fund in the U.S. market and currently stands as the fifth-largest ETF by assets.

QQQ has exposure to eight sectors, with information technology (43.9%) being the highest-weighted sector. Together with communication services (22.18%), and consumer discretionary (16.87%), this makes up around 82.95% of the Cubes’ portfolio. The fund has over 103 stocks with top names like Microsoft, Amazon, Apple, Facebook, Alphabet, Cisco, Intel, Comcast, PepsiCo comprising 54.87% of the entire portfolio.

Invesco-QQQ-composition-Kristal

The Exchange traded funds performance very closely tracks that of the NDX, as is evident from the image below. Just like its underlying index NDX, the ETF gives preference to companies with a higher market capitalization.

Since its inception in 1999, the QQQ ETF has seen five different market cycles. Barring the tech bubble crash of the early 2000s, the ETF has held its own and outperformed the S&P 500 multiple times. Even in the Great Financial Crisis of 2008, the Invesco QQQ Trust ETF fared better than the S&P 500 due to its composition and lack of financial firm holdings.

QQQ vs. NASDAQ performance
QQQ vs. NDX performance over the years
Invesco-QQQ-performance-over-market-cycles-Kristal
Source: Invesco.com | A look at QQQ’s performance over market cycles since ’99

But there are red flags, right?

Part of making any investment is understanding the inherent risks. With QQQ, one could argue that since it’s an Exchange Traded Fund with a huge bet on the technology sector, another tech crash could send the ETF down the rabbit hole.

That would be a fair question, indeed. Except it would take a dotcom bubble style crash for us to be in the mean reds. Inarguably, last year was a rollercoaster ride for technology companies worldwide. Lyft, Uber, and WeWork taught us a lot about what NOT to invest in. And a closer look at QQQ ETF (Invesco QQQ Trust)’s composition will tell you that it is made up of strong, resilient companies that are giants in the field. Fall they may, but they will more often than not bounce back just as strong. We all remember when everyone was willing to write off Amazon, don’t we? Look how that worked out.

In fact, over the years the weightage given to technology companies in QQQ has decreased, making it a well-diversified, wholesome slice of the top-performing companies across sectors.

Invesco-QQQ-performance-over-market-cycles-Kristal

At Kristal.AI, we love the Invesco QQQ Trust (QQQ ETF) for its exposure to innovative, high-performing stocks and believe it to be an excellent choice for the global Indian investor. So, if you have any doubts about investing in QQQ, technology, or the future of Jeff Bezos, do write into us at advisors@kristal.ai. We have opinions on almost everything.

Disclaimer

The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.

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