QQXT - QQXT Vs. QQQ: Tossing Tech Stocks Hasn't Worked Most Periods

2023-04-19 08:00:00 ET

Summary

• The First Trust NASDAQ-100 Ex-Technology Sector Index Fund is for investors who want more exposure to NASDAQ 100 stocks but not the technology ones they might hold elsewhere.
• The Invesco QQQ Trust holds every stock in the NASDAQ 100, including the approximately 34 excluded from QQXT.
• Both sets of ETFs/Indices are reviewed and compared in this article. History so far says avoiding the big Tech stocks can hurt performance, yet there are reasons to consider QQXT.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

I chose the Technology Select Sector SPDR ( XLK ) as it was the oldest one I know of. Since inception in 1998, XLK has a CAGR near 7.7%, but since the GFC market bottom, that soars to almost a 19% CAGR. That's compared to the S&P 500 since the bottom of 14.4% and the NASDAQ 100 returning 19.2%. While not an apples-to-apples comparison since XLK own stocks outside the S&P 500 and NASDAQ 100 indices, being exposed, long-term, to technology stocks hasn't added much to an investor's return. Here, I explore whether avoiding the NASDAQ 100 technology stocks had the same effect on return, yield, and risk by comparing the following two ETFs:

• First Trust NASDAQ-100 Ex-Technology Sector Index Fund ( QQXT )
• Invesco QQQ Trust ( QQQ )

First Trust NASDAQ-100 Ex-Technology Sector Index Fund review

Seeking Alpha describes this ETF as:

The investment seeks investment results that correspond generally to the price and yield (before the fund's fees and expenses) of an equity index called the NASDAQ-100 Ex-Tech Sector Index . Stocks classified as "technology" according to the Industry Classification Benchmark ("ICB") classification system, as are other stocks not in the NASDAQ 100 index. QQXT started in 2007.

Source: seekingalpha.com QQXT

QQXT has $164m in AUM and costs investors 60bps in fees; very high for an index-based ETF in my view. The TTM yield is about .8%, so not an ETF for income seekers.

Index review

Understanding the index helps investors know how stocks are selected and weighted which directly effects the ETF's allocations. The provider supplies this brief description.

The NASDAQ-100 Ex-Tech Sector Index is an equal weighted index based on the securities of the NASDAQ-100 Index that are not classified as Technology according to the Industry Classification Benchmark ("ICB") classification system. A security must be included in the Nasdaq-100 Index. Except as noted below, the Index follows the same Security Eligibility Criteria as the Nasdaq-100 Index. The Index is rebalanced quarterly such that all issuers within the Index are assigned an equal Index market value. For issuers represented by multiple securities, those issuers' Index market values are equally apportioned across their respective Index Securities.

Source: Nasdaq

QQXT holdings review

I start with sectors, which will be covered more in the comparison section of this article.

The top three sectors account for 70% of the portfolio; with Morningstar classifying the biggest two as Defensive in nature: something that would be good if the US enters a recession from the FOMC actions.

Being an equal-weighted ETF, the top holdings show how the stocks have moved relatively since the last rebalancing.

QQXT distribution review

After years of fluctuating payouts, the last two years show much improvement but the yield is still below 1%. In Seeking Alpha's grading system, this is still good enough to earn a "A+" grade.

Invesco QQQ Trust review

Seeking Alpha describes this ETF as:

The investment seeks investment results that generally correspond to the price and yield performance of the NASDAQ-100 Index®. To maintain the correspondence between the composition and weights of the securities in the trust (the "securities") and the stocks in the NASDAQ-100 Index ®, the adviser adjusts the securities from time to time to conform to periodic changes in the identity and/or relative weights of index securities. The composition and weighting of the securities portion of a portfolio deposit are also adjusted to conform to changes in the index. QQQ started in 1999.

Source: Seeking Alpha

QQQ has $172b in AUM; more than 100X what QQXT has. This ETF also has what I would consider a high fee for an index-based ETF: 20bps. The TTM yield is .7%; again not an ETF for income seekers but that isn't a surprise.

Index review

The same provider explains the base index as:

The Nasdaq-100 Index (NDX®) defines today's modern-day industrials-comprised of 100 of the largest and most innovative non-financial companies listed on the Nasdaq Stock Market based on market capitalization. The Index is home to many high-performing companies from popular sectors like technology, healthcare, consumer goods & services, and industrials.

Source: Nasdaq

QQQ holdings review

As expected and a reason some investor prefer QQXT, is the 48% weighting in one sector: Technology.

Here the top three sectors account for 80% of the portfolio. Also, Morningstar classifies the biggest two sectors as Sensitive, meaning a recession would have more effect on them than the two biggest sectors held by QQXT. Consumer Discretionary ranks in the top sectors for both ETFs.

Here, the top stocks would also be the largest in market-cap as that is how the portfolio is weighted.

Not being equal-weighted, the Top 20 account for 67% of the portfolio, the bottom 20 only 4%.

QQQ distribution review

We do not see the rapid increase here as the ETF that ignore the Technology stocks, some of which are non-payers. That helps explain the lower grade: "B+".

Comparing ETFs

As I would have expected with the removal of Technology stocks, the market-cap allocations for QQXT show more allocation to the Mid-Cap size holdings and also away from Growth stocks. The Top 10 reflects the missing stocks too, also the concentration changes by equal-weighting the portfolio.

Of course, removing an entire sector will affect the weights in the remaining ones. The next chart shows this.

HealthCare, Industrials, and Consumer Discretionary stocks were the beneficiaries of the 'No Tech" strategy. How one views those sectors becomes important in deciding on QQXT versus adding more QQQ to one's allocation. The Value/Growth shift is reflected in the following equity data.

The PortfolioVisualizer data shows one reason Not to own QQXT; Technology stocks have done very well over since 2016, though 2022 was a year to forget for Tech investors.

A bit of a surprise: avoiding Tech stocks only lowered the Beta from 1.06 to 1.02; not much of a risk reduction strategy by owning QQXT. The Seeking Alpha Quant ranking has a small preference for QQQ over QQXT.

Portfolio strategy

The only reasons I see to consider QQXT versus QQQ are:

• An investor already has exposure to the Technology stocks QQXT removed via owning QQQ or similar funds that hold those stocks and they still want/need the other exposure QQQ would provide.
• They trying to avoid those Technology stocks for a short-term trade without losing exposure to the other stocks in the NASDAQ 100 Index.
• A more balance sector allocation of the NASDAQ 100 stocks. A 50/50% allocation looks something like this (the 2 ETFs classify slightly differently).

If the second reason is the case, there are ETFs like the iShares U.S. Technology ETF ( IYW ) that investors with margin accounts could short when they feel Tech stocks are overvalued.

If the investor likes Tech stocks but doesn't want them dominating the ETF, consider one of the equal-weight NASDAQ 100 ETFs: QQQE And QQEW .

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