Breaking Down the QQQs

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Breaking Down the QQQs

Two items to review:

#1: The Investment Company Institute was out today with the latest US fund flow data, which now includes all of May 2020. Three points:

First: Money market funds are finally seeing their first significant redemptions since the start of the COVID Crisis:

  • Investors added $1.2 trillion to money market funds (MMFs) from March through mid-May. At their peak (week ending May 20th) total balances stood at $4,789 billion.
  • The week ending June 3rd (latest data) saw MMF balances decline by $36.3 billion. This is still far less than the $104 billion average weekly inflows from March to mid-April, but still signifies a noticeable shift in flows.
  • Most of that $36.3 billion of MMF outflows is from institutional MMFs, not retail products. The split: $33.9 billion from the former, $2.4 billion from the latter. Institutional products hold 67% of all MMF balances, so this lopsided difference is not due to relative asset size.

Second: May was a good month for long term fund flows but all that capital (and then some) went to fixed income and commodity products rather than equity:

  • Investors added an estimated $29.5 billion to long term (i.e. not MMFs) funds last month. That is stronger than April’s $9.3 billion or 2019’s average of $18.6 billion/month.
  • Equity products had $53.7 billion in redemptions in May, however. Investors only added capital to fixed income ($80.0 billion of inflows) and commodity funds ($6.2 billion, mostly precious metals) last month.
  • Worth noting: municipal bond funds started to see inflows in May after March and April’s collective $48.0 billion in redemptions. Weekly inflows for the last 2 weeks of May and early June ran $2 – $3 billion/week, a good sign that investor confidence is returning to this market.

Finally: when considering what all this means for asset prices, we come to the conclusion that the money flow data is more bullish for bonds than for stocks:

  • Mutual and exchange traded fund investors had been net sellers of equity products for years. In 2018 and 2019 they sold a combined $247 billion; for 2020 YTD equity product redemptions total $132 billion. And the year isn’t even half over.
  • Fixed income flows do vary with market volatility, but once that passes inflows always resume. March 2020 saw bond fund outflows of $273.7 billion, by far the largest month of redemptions in many years. May, however, is back on track with $80 billion in inflows.

Bottom line: money flows are more about investor sentiment than a reliable predictor of future asset prices, with May’s money flow data showing that fixed income remains the preferred destination for capital leaving money market funds.

#2: With the NASDAQ Composite Index breaching 10,000 for the first time ever today, let’s look at the QQQ exchange traded fund. First, a reminder: the QQQ ETF tracks the NASDAQ 100, not the Composite. There is a Comp ETF – Fidelity’s ONEQ product – but it only has $2.7 billion in assets under management. The QQQs, which opened 4 years before ONEQ in March 1999, has $112.6 billion in AUM.

With that bit of ETF trivia dispensed, here are 3 points about the QQQs that shed some light about the current state of US equity investing.

First, the QQQs lead the pack in terms of equity ETF inflows for Q2-to-date with $5.5 billion of fresh capital. That is:

  • 38% of all equity ETF inflows in the current quarter.
  • The same as the combined QTD inflows for all environmental, social and governance (ESG) equity ETFs ($5.5 billion).
  • More than the QTD inflows for all “Growth” equity ETFs ($3.9 billion) or “Value” equity products ($1.6 billion).

Takeaway: for those with memories that reach back to the dot com bubble, seeing so much capital flow into this one product is an odd bit of deja vu.

Second, the QQQs are a very concentrated portfolio at present:

  • The top 10 positions are 54% of the fund. That compares to 25.7% for the S&P 500 and 3.6% for the Russell 2000.
  • The top of the sheet has the usual suspects: Apple (11.7% weighting), Microsoft (11.2%), Amazon (10.0%), Google (7.7%) and Facebook (4.5%).
  • 4 of those 5 names made all-time highs today; the only laggard is Google.
  • Apple, Microsoft and Amazon are all up 20% – 40% this year, Facebook is up 15% and Google is up 10%.
  • If the QQQs were even-weighted instead of tied to market cap, they would be up 9% on the year rather than 16% (QQQE is the even-weighted ETF).

Takeaway: as we noted in the first part of this section, money flows tell us a lot about investor psychology and the increasing popularity of the QQQs says investors are OK chasing big winners even as they lighten up on equities generally.

Lastly, a broader question/thought: who is buying the QQQs or MSFT, AAPL, MSFT and FB at all-time highs when we’re supposed to be more excited by stocks that more precisely leverage America’s economic reopening? Three thoughts to address that and close out the Data section:

  • One scenario is that investors are cycling back into relatively safe Tech plays because they are worried about a second wave of COVID infections slowing the pace of economic reopening.
  • Another is that they think the rotation into cyclical stocks over the last 3 weeks went too far, too fast and are moving back into Tech while Financials, Industrials and other groups take a breather.
  • The last explanation is simply that there’s too much capital chasing high-beta stocks just now, as evidenced by the recent mania around low priced stocks.

In the end we suspect it’s all three to varying degrees.

Sources:

Investment Company Institute money flow data: https://www.ici.org/research/stats