QQQE - QQQE: Worst New Bull Market Ever

2023-10-06 13:39:24 ET

Summary

• Direxion NASDAQ-100® Equal Weighted Index Shares ETF offers an equal-weighted approach to investing in NASDAQ, providing broader diversification and balanced exposure across market segments.
• The QQQE ETF differs from QQQ by underweighting technology, communication services, and consumer discretionary sectors, potentially offering a more balanced investment strategy.
• QQQE's performance is still reliant on the tech sector, making it vulnerable to a decline if money starts rotating out of the sector.

One machine can do the work of fifty ordinary men. No machine can do the work of one extraordinary man. - Elbert Hubbard.

I've attacked the "new bull market" narrative for several months now, and every day that goes by it appears more and more are realizing I was right all along. Everyone was fooled by idiosyncratic risk in the large-cap averages, most notably the NASDAQ 100-Index (NDX). Most stocks outside of the Magnificent 7 haven't done all that well, and appear to have been in a bear market rally, not a new bull market.

Is there a catch-up trade at some point? Potentially yes, and that's where the Direxion NASDAQ-100® Equal Weighted Index Shares ETF ( QQQE ) comes into play. QQQE seeks to provide investment results that correspond to the NASDAQ-100 Equal Weighted Index before fees and expenses. The primary goal is to offer an investment avenue that leverages the growth potential of NASDAQ's largest non-financial companies while mitigating the risks associated with market capitalization-weighted indexes.

Importantly, the QQQE ETF adopts an equal-weighted approach where each constituent is initially set at 1% weight. This methodology is designed to offer broader diversification, allowing for more balanced exposure across market segments and individual stocks. It also aims to give greater performance contribution from companies with smaller market capitalization.

ETF Holdings and Components

The QQQE includes 100 of the largest non-financial securities listed on NASDAQ. However, unlike traditional market capitalization-weighted indexes, each constituent of the QQQE is initially set at a weight of 1%. The QQQE's holdings represent a broad range of sectors, with information technology, communication services, and consumer discretionary being the most prominent ones.

When we look at sector weightings relative to the NASDAQ 100, we can clearly see that what makes QQQE different is that the equal weighting methodology results in sector underweights in Technology, Communication Services, and Consumer Discretionary.

Peer Comparison: QQQE vs. QQQ

When comparing the QQQE ETF to other similar ETFs in the market, the most notable competitor is the Invesco QQQ Trust ETF (QQQ). The QQQ is also based on the NASDAQ-100, but unlike QQQE, it is a capitalization-weighted index ETF.

Over the past decade, QQQ has consistently outperformed QQQE. This can largely be attributed to the meteoric rise of mega-cap tech stocks like Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOG) (GOOGL), which carry significant weight in QQQ due to its capitalization-weighted methodology.

However, it's essential to note that the dominance of these mega-cap stocks introduces a higher level of concentration risk in QQQ. As such, while QQQ has outperformed QQQE in the past, the latter's equal-weighted approach could potentially offer a more balanced and risk-averse investment strategy.

This is perhaps the real reason to consider rotating. The top heaviness of the NASDAQ relative to everything else.

Potential Risks and Market Vulnerabilities

While the QQQE's equal-weighted methodology offers several advantages, it's not immune to market vulnerabilities. The ETF's performance is still heavily reliant on the broader technology sector, which has been experiencing a significant bull run for the past few years. If money starts rotating out of the tech sector, QQQE could be vulnerable to a significant decline.

Moreover, QQQE's underperformance against QQQ suggests that this was never a healthy market to begin with. The fact that a small number of mega-cap stocks are driving the market performance is a cause for concern and could signal an impending market correction (or corporate credit event).

Conclusion

The Direxion NASDAQ-100® Equal Weighted Index Shares ETF offers a unique take on trading and investing in the NASDAQ. However, its heavy reliance on the tech sector is still an issue from my vantage point. I wouldn't consider initiating a position here, but I do think it's worth paying attention to as a fund for whenever a real new bull market begins that is driven by more than just 7 names.

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