Our discussion of Tesla and index investing in yesterday’s Disruption section got us thinking more broadly about the QQQs, aka the Invesco ETF that tracks the NASDAQ 100. Here’s why:
- QQQ is the 5th largest US-listed equity ETF, with $92 billion in assets under management.
- While TSLA is not in the S&P 500, it does have a 1.9% weighting (as of yesterday) in the NASDAQ 100 and therefore the QQQs.
- While QQQ is not the largest ETF that owns TSLA – VTI (Vanguard Total Stock Market ETF) has a 0.4% position – its larger weighting means it owns $1.5 billion of the stock (again, as of yesterday) versus just $561 million in VTI. The QQQs own more TSLA than any other ETF, in fact.
- TSLA has added approximately 1 percentage point of performance to the QQQs this year, which are up 7.3% YTD.
All this cuts both ways, of course: TSLA’s 17.2% decline today clipped 0.3 points from the QQQs, which only rose 0.3% versus the 1.1% rally in the S&P 500.
Still, TSLA’s noticeable impact on the QQQs highlights a larger point: this ETF is as pure a measure of investors’ perceptions of the value of disruptive innovation as exists in a large passively managed fund:
- US Big Tech weightings total 44.2% of the QQQs: Apple (11.8%), Microsoft (11.4%), Amazon (8.5%), Google (8.3%), and Facebook (4.2%).
- There are no Financials/Materials/Energy stocks in the index (18% of the S&P 500), with Utilities (1%), Industrials (3%) and Health Care (7%) at significant underweights to the S&P.
With all that in mind, consider the following:
#1: ETF investors have been selling QQQ in 2020.
- Year-to-date redemptions total $919 million according to xtf.com.
- Those sales come even as investors have added $34 billion to equity ETFs this year.
Upshot: it’s not just the QQQs – investors are sensibly de-risking portfolios after last year’s outsized gains. We’ll have a more complete money flow review tomorrow, but that’s one central message from the data.
#2: Even disruption can be mispriced.
- We traded the QQQs at SAC Capital in the late 1990s. They doubled from March 1999 to their peak in March 2000. Good times, those…
- Then the dot com bubble burst and they dropped 80% over the next 18 months.
- If you held the QQQs from the March 2000 top you did not break even on a price basis until July 2015.
- The CAGR on the QQQs from March 2000 to today is 3.6%, barely half that of the S&P 500 over the same timeframe.
Upshot: with all the chatter about Tech stocks being too frothy just now, the QQQs are “only” up 33% in the last year. That’s a far cry from the 100% return of 1999 – 2000. That was a real mania; today you can’t even get investors to buy the QQQs as the prior point shows.
#3: Contrary to the old Mae West quote, too much of a good thing isn’t necessarily wonderful:
- Owning a fund with no Energy exposure leaves you open to oil shock risk.
- No Financials exposure means limited upside from rising interest rates.
- 21% of the QQQs sit in Amazon, Google and Facebook, 3 companies with meaningful regulatory risk in a US general election year.
- Growth stocks represent 84% of the fund, almost the same level as the S&P 500 Growth Index. It will therefore miss any Value rotation.
Upshot: the QQQs are a very specific bet, and even with our long-term bias to own disruptive companies we understand why investors are lightening up here.
Bottom line to all this: it is difficult to develop an index that adequately captures the power of disruptive innovation without leaving itself open to macro risks or the natural ebb and flow of investment cycles. On top of that, disruption naturally lends itself to investor overestimation of future returns. All that said, every investor needs some exposure to this theme that comports with his or her risk tolerance.