2023-12-28 08:00:00 ET
Summary
- QQQM was welcomed as a better option for investors in the Nasdaq 100 index when launched in 2020. But its low AUM and volume were an initial concern.
- QQQM's price has outperformed QQQ especially in boom markets and pays a slightly higher dividend. But the outperformance varies from year to year.
- QQQM's AUM and liquidity have improved to where they aren't a threat to its continuation, but there are other significant reasons why QQQM might be terminated or merged with QQQ.
Three years ago Invesco, in October of 2020, the company behind The Invesco QQQ Trust (QQQ) launched a second ETF, the Invesco Nasdaq 100 ETF (QQQM). It invested in the same index as QQQ, the Nasdaq 100. That index holds the 100 largest cap stocks that IPO'd on the Nasdaq exchange. Though there is no mandate for this index to hold Tech stocks, many of the stocks that now dominate the Tech world IPO'd on the Nasdaq exchange, starting in the 1990s. So the Nasdaq 100 is widely perceived to be the best ETF for investing in Tech growth.
The launch of the new Nasdaq 100 ETF, QQQM, was greeted with enthusiasm by some buy and hold investors for two main reasons. One was that QQQM's .15% expense ratio was lower than the .20% expense ratio of QQQ.
The other reason was that when QQQ, which launched in 1999, was designed as a Unit Investment Trust whose longevity was linked to the lifespan of 15 people born between 1986 and 1996. This meant that should those 11 people die QQQ would have to be terminated. QQQM, in contrast, was structured as a standard ETF that would be wound up only when Invesco decided to terminate it.
It also appears that the dividends paid by stock Unit Investment Trusts are not qualified dividends but are taxed at regular income rates, while those paid by ETFs are qualified dividends taxed at 0%, 15%, or 20% depending on the investor's tax bracket. If that is the case then, QQQM would also have an advantage over QQQ in that its dividends, though generally considerably less than 1%, given its heavy tilt towards growth stocks, should be qualified dividends.
When I reviewed QQQM in an article published on December 20, 2020, I concluded that its lower expense ratio and lack of the QQQ's Unit Investment Trust's possibly problematic structure made it worth watching. But I also explained that it was too new and too thinly traded for us to draw conclusions as to whether it would be a good long-term investment.
Now that QQQM has a three-year-long trading history, I thought it was time to take another look.
The Biggest Problem With QQQ Was Eliminated Just After QQQM's Launch
My article published on December 20, 2020, was submitted a day earlier, to allow time for Seeking Alpha's editors to review it. This is significant because on the same day that my article was published, the news broke that QQQ had changed its rules to state that the fund's expiration date would now be tied to the "maturity, redemption, sale or other disposition" of its last security." It no longer had to worry about the longevity of 15 millennials. This removed what may have been the biggest concern of long-term buy and hold investors wishing to invest in the Nasdaq 100, especially those looking to leave their holdings to heirs.
I have been unable to determine if QQQ's dividends are, in fact, taxed as ordinary income. If so, it doesn't look like the change in its end date would change this, as QQQ still remains a trust, albeit one whose end date has been changed so that it no longer depends on the fate of those 15, potentially accident-prone or disease-ridden, Millennials.
How Has QQQM Performed Compared to QQQ?
As you can see, when we compare the price performance of QQQM and QQQ since QQQM's inception, QQQM's slightly lower expense ratio does seem to have let it outperform QQQ by .15% which is exactly what you'd expect given that .05% higher expense of QQQ per year.
QQQM vs QQQ Price Return Since QQQM Inception in December 2020
When we factor in dividends, QQQM's outperformance is twice as high at .29%
QQQM vs QQQ Total Return Since Inception December 2020
Seeking Alpha
That excess total return of QQQM appears to be caused because QQQM has been paying a higher dividend than QQQ. For example, at the end of 2023 after its last dividend for the year was paid, its Trailing 12 Month Dividend was .65% while that of QQQ was only .56%. Note that this is a larger amount of outperformance than could be explained solely by the difference in their expense ratios.
QQQM's Price Return Has At Times Been Better Than QQQ's over Shorter Time-Frames
But before we get too excited we need to look at some other intervals to see if QQQM has consistently outperformed QQQ.
Below you can see a comparison of QQQM and QQQ's price performance over the past year.
QQQM vs QQQ Price Return December 23 2022 - December 23, 2023
Seeking Alpha
Here we see that during the surprise boom in the Nasdaq 100's performance that occurred in 2023, QQQ's price return showed a.05% advantage over that of QQQM.
When dividends are factored in, however, QQQM's total return was still .10% higher than that of QQQ over all of 2023 due to its higher dividend.
QQQM vs QQQ Total Return December 23, 2022 - December 23, 2023
Seeking Alpha
For comparison, when we check out the comparison of these two ETFs during the dismal year of 2022 when the Nasdaq 100 dropped more than 30% we see this:
QQQM vs QQQ Price Return December 23, 2021 - December 23, 2022
Seeking Alpha
QQQM vs QQQ Total Return December 23, 2021 - December 23, 2022
Seeking Alpha
Here we see that during the dismal year of 2022 QQQM outperformed QQQ in terms of its price by only .04%. QQQ's total return was only .06% better even with dividends included.
This suggests that QQQM is likely to outperform QQQ over the long term though that outperformance is much better when the Nasdaq 100 index is booming.
QQQM's Assets Have Grown Dramatically Since Inception
When I wrote about QQQM back in December of 2020, shortly after its inception, Invesco had reported its assets as being only $350.3 million. Since the biggest threat to a buy and hold investor investing in a taxable account is that the ETF's sponsor may terminate the ETF returning their capital--and potentially a significant, taxable capital gain--the size of QQQM's asset holding was a concern.
As I write on December 27, 2023, Invesco reports that QQQM's assets are now worth $18.315.4 Billion. This is a respectable amount for an ETF, though a tiny fraction of QQQ's $229.72 Billion value.
How Liquid is QQQM?
When I reported on QQQM's trading volume two months after its inception I noted that it was very small and uneven, with many days with very low volume balanced by a few when volume spiked far higher. This differed from the pattern of QQQ's trading which was far smoother.
When I looked at the daily volume for QQQM over the past year, using the same chart I had used back in my 2020 article, I saw that QQQM's daily volume is still far choppier than that of QQQ, as you can see below.
QQQM Daily Volume 2023
QQQ Daily Volume 2023
However, what has changed is the size of QQQM's daily volume. The lowest volumes depicted on the 2023 chart above were around 400,000 shares traded daily, while as the year progressed the daily volume traded was closer to 1 million shares except on days affected by holidays. This is still enough volume to allow for safe trading. Though of course, it is still far lower than the immense share volumes seen for QQQ's daily trades.
Along the same lines, Invesco reports that as of December 27, 2023, QQQM's 30 Day Average Trading Volume is 1,476,540 shares. Seeking Alpha's Quant feature gives QQQM a Liquidity Grade of A. Once again, as expected QQQ's 30 Day Average Trading Volume is far, far higher at 45,229,048 shares. Seeking Alpha's Quant feature gives QQQ a rating of A+.
There is Still Some Risk QQQM Could Be Terminated
However, because Invesco's QQQM ETF invests in the identical index that its QQQ tracks, there is still some risk that QQQM might be terminated, or, more likely, merged into QQQ.
It is quite possible that the process of setting up QQQM was initiated at a time when Invesco was not certain that it could change the Trust Termination definition of QQQ. That change to QQQ's trust definition only took place in December of 2020, months after QQQM's October launch. Hence it is possible that Invesco created QQQM as a backup in case QQQ faced a sudden termination because all 15 millennials listed in its trust documentation had succumbed to Covid-19, which was a real possibility throughout most of 2020 before the advent of an effective vaccine.
Since that issue has been resolved with QQQ's trust termination being amended in December of 2020, it is hard to understand why it would continue to benefit Invesco to maintain two almost identical ETFs, one of which has a lower expense ratio and hence is less profitable for Invesco.
Were Invesco to terminate QQQM it is likely it would merge it with QQQ which should not result in a capital gain for holders in a taxable account but could change its expense ratio, and hence lose the advantage QQQM's lower expense ratio seems to have conferred. However, it is always possible that the merger could extend QQQM's lower expense ratio to QQQ's investors. It is impossible to know. In any case, this issue should not stop investors from considering QQQM as a long-term investment.
QQQ Retains the Advantage for Investors Who Trade Options
Investors who trade options on their holdings would still do better to invest in QQQ rather than QQQM. Open interest in QQQM options is tiny compared to that of QQQ and few options trade daily.
This reinforces the idea that QQQM is most suitable for buy and hold investors who do not trade often and don't hedge their portfolios with options.
Bottom Line: QQQM Is A Good Choice for Buy and Hold Investors
For retail investors who invest small amounts on a weekly or monthly schedule, and who want to invest in the Nasdaq's top 100 holdings, QQQM offers a slight performance advantage which if held for many years could compound to a significant gain. It has grown large enough to be a safe ETF investment, though there is still some possibility that it might be terminated or ideally, merged with its much huger, much more liquid sister ETF, QQQ.
Investors who trade in and out of the market and who use options to hedge their portfolios would still be more likely to do better in QQQ given its superior trade volume, its greater visibility to investors, and its far, far more active options market.
For further details see:
QQQM: A Better Nasdaq 100 ETF Than QQQ For Long Term Investors?