ONEQ - ONEQ: Tech-Focused Nasdaq Based ETF Historically Generated High Price Growth

2023-09-18 02:21:43 ET

Summary

• Fidelity Nasdaq Composite Index ETF invests in growth and value stocks in the technology sector, with a focus on Nasdaq-listed companies.
• The ETF has a heavy weighting towards giant-cap technology stocks, which may increase single-stock blowup risk and market risk.
• ONEQ has consistently generated strong price growth over the long run, making it a good option for long-term growth-seeking investors. However, it currently has a low yield and is not recommended for further buying.

~ by Snehasish Chaudhuri, MBA (Finance)

Fidelity Nasdaq Composite Index ETF ( ONEQ ) is an exchange traded fund that invests in growth and value stocks of companies operating in the technology sector. The fund invests in equity markets primarily in the US. This ETF is in operation for exactly 20 years and has been paying quarterly dividends on a consistent basis. However, the yield has been consistently low, ranging around 1 percent. ONEQ has an assets under management of $5.09 billion, and an expense ratio of 0.21 percent. Being a Nasdaq focused fund, it has a very low portfolio turnover ratio - only 8 percent. The ETF has generated a year-to-date price growth of 34 percent and is currently trading almost at par with its NAV.

ONEQ’s Heavy Weightings For A Few Giant-Cap Stocks Lead to Concentration Risk

Fidelity Nasdaq Composite Index ETF uses a sampling strategy to track its benchmark index, which is reconstituted and rebalanced daily. ONEQ tracks only a market-cap-weighted index of Nasdaq-listed companies, and ignores those trading on the NYSE or other exchanges. Its portfolio primarily includes technology firms, as those stocks have dominated the Nasdaq market. Its heavy weightings to giant-cap stocks may increase single-stock blowup risk. This exposure has translated to higher market risk. However, there is little risk of the fund being closed or withdrawn, as there is significant daily trading volume in excess of $13 million. Average daily volume stands at 0.23 million.

Tech-focused Giant-Caps Should Set the Direction of Nasdaq Composite & ONEQ

Fidelity Nasdaq Composite Index ETF was launched and is managed by Fidelity Management & Research Company LLC. ONEQ is co-managed by Geode Capital Management, LLC. The fund seeks to track the performance of the Nasdaq Composite Index, by using representative sampling techniques, that focus on factors such as market capitalization, price to earnings (P/E) ratio, price to book value (P/B) ratio, sectoral distribution, earnings growth, dividend yield, etc. This fund currently has a net asset value ((NAV)) of $54.85.

20 out of ONEQ’s top 25 holdings are technology-based stocks. Top eight holdings of Fidelity Nasdaq Composite Index ETF, which accounts for almost half of ONEQ’s portfolio, are the giant-cap technology-oriented stocks like Apple Inc. ( AAPL ), Microsoft Corporation ( MSFT ), Amazon.com, Inc. ( AMZN ), NVIDIA Corp. ( NVDA ) Alphabet Inc. Class A ( GOOGL ), Alphabet Inc. Class C ( GOOG ), Tesla Inc. ( TSLA ), Meta Platforms Inc. ( META ). It's not unusual for a NASDAQ based ETF. These eight stocks also account for almost half of the Nasdaq Composite Index. It's obvious that the price movement of these eight stocks will set the direction of Nasdaq Composite Index as well as for ONEQ.

ONEQ Generates Low Yield, But Consistent Strong Price Growth Over the Long-Run

Let me do a comparative analysis with another three Nasdaq based ETFs - Innovator Growth-100 Power Buffer ETF - January ( NJAN ), Global X Nasdaq 100 Covered Call & Growth ETF ( QYLG ) and Innovator Nasdaq-100 Power Buffer ETF - April ( NAPR ). First of all, all these funds are relatively new and introduced in 2020. These funds have a low assets under management (less than $150 million) and very high expense ratio in between 0.6 and 0.8 percent. Their prices and trading volumes are also much lower than that of ONEQ. Although half of ONEQ’s AUM is invested in only 8 stocks, Fidelity Nasdaq Composite Index ETF has lower concentration risk as compared to its peers.

Its turnover ratio also makes it best among its peers. Only QYLG generates strong yield (4-year average yield of 6.91 percent). However, in terms of price growth, Fidelity Nasdaq Composite Index ETF is way ahead. ONEQ’s YTD price growth of 31.5 percent is much higher than those funds generating price growth within a range of 18 to 24 percent. Between 2016 and 2021, ONEQ generated an annual average total return of 23.2 percent. The way technology stocks have started performing since the beginning of 2023, it won’t be unfair on the part of ONEQ’s shareholders to expect consistent double-digit total returns. This surely is a good option for long-term growth-seeking investors.

Renowned Names in Semiconductors Are an Integral Part of ONEQ’s Top Holdings

What is impressive about ONEQ’s composition is the other 12 technology stocks that feature among its top 25 holdings. A major part of these stocks belongs to the semiconductor sector. Broadcom Inc. ( AVGO ), Advanced Micro Devices, Inc. ( AMD ), Intel Corporation ( INTC ), Texas Instruments Incorporated ( TXN ), Applied Materials, Inc. ( AMAT ) and Qualcomm Incorporated ( QCOM ) are renowned names in the semiconductor space. Baring INTC, all these stocks generated strong price growth over the past five years. After a few poor years, INTC too have recovered this year and recorded a YTD price growth of 42 percent. I have a presumption that the share of semiconductor stocks in this Nasdaq ETF’s portfolio will keep on increasing over the coming quarters.

This list further includes stocks of companies engaged in the business of communication equipment manufacturing & services such as Cisco Systems, Inc. ( CSCO ), Comcast Corporation ( CMCSA ), and Netflix, Inc. ( NFLX ); and stocks of application software developers like Adobe Inc. ( ADBE ), Intuit Inc. ( INTU ) and Honeywell International Inc. ( HON ). These stocks, too, are quite popular among the tech fund investors. However, they are a bit cyclical in nature, although will continue to generate high price growth over the long run. Growth prospects of the semiconductor industry in the coming decade are beyond any doubt, and thus the presence of a large number of semiconductor stocks will surely be beneficial for the Fidelity Nasdaq Composite Index ETF.

Investment Thesis

Fidelity Nasdaq Composite Index ETF invests in growth and value stocks of companies operating in the technology sector. 20 out of ONEQ’s top 25 holdings are technology-based stocks. Top eight holdings are in giant-caps which account for almost half of its portfolio. Besides this, this ETF has made investments in a good number of semiconductor stocks, and I expect the share of semiconductor stocks to keep on increasing over the years. Future prospects of this industry in the coming decade are beyond any doubt, and thus having a good number of semiconductor stocks will be helpful for this fund.

ONEQ seems to be way ahead of other similar Nasdaq focused funds, with a higher AUM, and trading volume, low expense ratio and lower concentration risk. ONEQ is also way ahead in terms of price growth. Over the long run the fund has been able to generate strong double-digit total returns. The way technology stocks have started performing since the beginning of 2023, it won’t be unfair on the part of ONEQ’s shareholders to expect such returns over the long-run. This seems to be a good option for growth-seeking technology investors. However, a 34 percent YTD price growth wipes out any chances of abnormal returns in the short-run. Currently, it is trading almost at par with its NAV, and thus is not recommended for further buying. I’d assign a hold rating.

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