Invesco's QQQ celebrates silver anniversary on a roll

The Invesco QQQ ETF is celebrating silver anniversary this year as it marks 25 years of existence. The returns thus far in 2024 have been pure gold. The question facing investors now is whether the fund can make that "magnificent" momentum last.

The QQQ tracks the Nasdaq-100, an index of 100 largest nonfinancial companies listed on the Nasdaq. The QQQ is up 7.3 percent year to date and 50.7 percent over the past 12 months. That’s a heck of an anniversary present for investors, outpacing the S&P 500 index, which is up 7.1 percent this year and 30.3 percent over the past year.

The QQQ is the fifth largest ETF in the world, with net assets of $254 billion, or about half the size of the largest ETF, the SPDR S&P 500 ETF Trust (SPY).

Of course, the QQQ is a far more concentrated index than the S&P 500, both in terms of the number of stocks and the number of sectors represented. It’s also on a “magnificent” run because a full seven of its top seven holdings are members of the so-called “Magnificent 7” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – a group of stocks that has surged over the past year due to its members’ AI associations.

Microsoft, for example, makes up 8.8 percent of the QQQ and is up 12 percent in 2024 and 63.5 percent over the past 12 months. NVDA is 5.6 percent of the QQQ and is up a whopping 91 percent in 2024 and 300 percent in the past 12 months. And so on.

The worry among investors and their advisors is that the Magnificent 7 could lead the QQQ down just as fast as it led it up. Sure the QQQ was up 55 percent in 2023, but it also fell more than 32.5 percent when markets fell apart in 2022.

Paul Schroeder, QQQ equity product strategist at Invesco, understands investors' concerns over concentration, saying it's not unusual to see the top 10 holdings comprise a major part of the overall fund.

“Right now, the top 10 stocks make up just about 48%,” Schroeder said. “So it's not a new trend, and [it's] something that we've seen play out throughout the years. And really, we see a lot of those companies have expanded and become a major part of just the broader market in general.” 

Mark Marex, senior director of index research and development at Nasdaq, notes that while concentration is a factor in the makeup of the underlying index, they do “adjust the weights on a quarterly and on an annual basis to make sure that there isn't too much excess concentration.”

QQQ: AN INNOVATION SENSATION

The secret ingredient behind the success of the companies held in the QQQ is innovation, Schroeder says. And that innovation can be measured by the company's relative spending on research and development.  

“We see your average QQQ company outspending your average S&P 500 company on research and development by about 2 to 1,” he said. “If you take out the Q's companies from the S&P 500, that metric goes up to 15 to 1. So really, we've seen these US companies grow and become the cream of the crop of the S&P 500 when it comes to innovation.” 

Schroeder also tips his hat to the Nasdaq for “attracting new technologically focused companies to list on their exchange.

“We've also launched other products that go into what we call the ‘broader innovation suite,’ so you're now able to gain exposure not only to large-cap growth but also mid-cap growth through QQQJ, and also a small-cap growth through QQQS,” he said.

Marex also sees the Nasdaq-100 as being in the “innovation space,” and, as such, more diversified than people might think despite its heavy weightings in technology, consumer discretionary and health care.

“It's not even a US-only index, technically speaking, because you just have to be Nasdaq-listed,” he said. “We have a handful of internationally based companies that are included in the index year in and year out. So again, I think it's a very unique kind of diversified way to play the innovation space in large-cap equities. And that's what really sets it apart.”