QQQM - QQEW: Not My Preferred Nasdaq 100 Play

2023-11-02 06:00:00 ET

Summary

• The First Trust NASDAQ-100 Equal Weighted Index Fund ETF tracks the performance of the Nasdaq-100 Equal Weighted Index.
• QQEW charges a high management fee of 0.58% compared to other Nasdaq-100 ETFs.
• QQEW has historically underperformed the Nasdaq-100 and has failed to deliver lower volatility.
• QQEW is significantly underweight high-quality companies compared to market cap-weighted ETFs such as QQQ or QQQM.
• My preferred way to get exposure to the Nasdaq-100 is QQQM.

ETF Overview

The First Trust NASDAQ-100 Equal Weighted Index Fund ETF ( QQEW ) seeks to track the performance of the Nasdaq- 100 Equal Weighted Index. The Index consists of the same securities as the Nasdaq- 100 Index but each of the securities is set to a weight of 1.00% and is rebalanced quarterly.

QQEW currently has $1.8 billion in net assets and charges a 0.58% net expense ratio.

High Management Fee

QQEW charges a relatively high management fee of 0.58%. To put that into context, the average expense ratio for an actively managed equity mutual fund is ~0.66% and the average equity ETF expense ratio is ~0.16%. Comparably, the Invesco QQQ ETF ( QQQ ), which tracks the Nasdaq- 100 has an expense ratio of just 0.20% and the Invesco Nasdaq 100 ETF ( QQQM ) has an expense ratio of just 0.15%.

The Direxion NASDAQ-100 Equal Weighted Index Shares ETF ( QQQE ) charges a net expense ratio of just 0.35%. QQQE does essentially the same thing as QQEW but charges a 40% lower fee. Thus, QQEW is clearly overpriced relative to another ETF which offers essentially the same exposures.

Weak Historical Relative Performance

QQEW launched in April 2006 and has underperformed the Nasdaq-100 since then. Since inception, QQEW has returned ~436% compared to a return of ~842% delivered by the Nasdaq 100 (proxied by QQQ below.)

In addition to underperforming the Nasdaq-100 by a significant amount, QQEW has failed to deliver significantly lower volatility. As shown by the chart below, QQEW has delivered an average 30-day rolling volatility of ~19.4% compared to ~20% for the Nasdaq-100.

In addition to underperforming the Nasdaq-100, QQEW has also underperformed its peer QQQE. Since the inception of QQQE, March 2012, QQEW has delivered a total return of ~293.1% compared to a total return of 301.6% delivered by QQQE. This result makes sense given the lower management fee exhibited by QQEW.

Underweight The Best Companies

Relative to the Nasdaq-100, QQEW is significantly underweight the largest companies in the Index. The largest 5 holdings in the Nasdaq 100 Index, Apple ( AAPL ), Microsoft ( MSFT ), Alphabet ( GOOG ), Amazon ( AMZN ), and NVIDIA ( NVDA ) account for ~37.4% of the entire Nasdaq-100. Comparably, these stalwarts account for ~5% of QQEW.

My view is that AAPL, MSFT, GOOG, AMZN, and NVDA represent very attractive investment opportunities due to their competitive advantages. The high-quality nature of these companies is what has propelled them to be the weight they currently are in the Nasdaq- 100.

I believe the QQEW is overweight the lower quality companies in the Nasdaq-100. Given my focus tends to be on high-quality companies, I do not find the equal-weight approach to be attractive.

My Preferred Nasdaq 100 Play

My preferred way to express long exposure to the Nasdaq 100 is through a market capitalization-weighted product: Invesco Nasdaq 100 ETF. QQQM offers a market cap-weighted approach and offers a slightly lower fee than QQQ (0.15% vs 0.20%). For this reason, QQQM is my preferred Nasdaq 100 play.

Conclusion

QQEW charges a very high management fee for a passive product. The fund's equal-weight approach has resulted in significant underperformance compared to the traditional capitalization-weighted Nasdaq-100. Furthermore, QQEW has failed to deliver lower levels of volatility than the Nasdaq- 100.

In addition to underperforming the cap-weighted Nasdaq-100, QQEW has also underperformed QQQE which represents a way for investors to get exposure to the equal-weighted Nasdaq-100 Index for a lower management fee.

I believe this underperformance is likely to continue going forward given the fact that QQEW is significantly underweight high-quality companies such as AAPL, MSFT, GOOG, AMZN, and NVDA. As such, I prefer capitalization-weighted Nasdaq-100 Index products such as QQQM compared to equal-weighted products.

In the event investors are looking for exposure to the equal-weight version of the Nasdaq-100, my view is that QQQE represents a more efficient way to get that exposure given the lower level of fees.

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