QQQM – A Tech-Focused ETF To Tackle the Selloff

QQQM – Invesco NASDAQ 100 ETF

Defensive blue-chips such as consumer staples, healthcare, and utilities are time-tested ways to minimize revenue, earnings, cash flow, and dividend declines in economic downturns. The Nasdaq tends to have higher volatility than the broader market and so it isn’t traditionally thought of as defensive.

However…

In terms of fundamentals, such as sales, earnings, cash flow, and dividends, QQQM – Invesco NASDAQ 100 ETF is the most defensive dividend growth ETF I’ve ever found. QQQM is, in my opinion, the best way to capitalize on the massive tech selloff we are currently experiencing. The fund’s large-cap stock concentration not only lowers the downside risk but increases its ability to generate gains during future bull markets. Long-term investors will also benefit from a low expense ratio and dividend. Selling in tech stocks due to concerns about slowing growth, interest rates, and geopolitical tensions has created an opportunity for investors who can hold investments for the long-term.

The Nasdaq ETF has both long-term income growth potential, as well as the ability to deliver superior long-term returns. Visit the Invesco site HERE for more details.

Defensive – QQQ and QQM Dividend Growth ETF

*QQQ and QQQM (lower cost version) are great ways to gain diversified tech exposure for the average dividend growth investor. QQQ saw its earnings grow 16% in the Great Recession and 10% in the Pandemic, and its dividends grew similar amounts. QQQ represents a variety of fast-growing, blue-chip stocks. Many of these stocks also hold the competitive advantage of a wide moat model.

Analysts expect QQQ to deliver ~13.7% long-term returns in the future, which is nearly identical to its historical returns since 1999.

QQQ’s 17% long-term dividend growth rate is 2X that of the S&P and far better than any other dividend ETF I’ve seen, making it a potentially great defensive dividend growth option for this, or any future recession. Note, I said “dividend growth” option.

*QQQM has a .15 expense ratio versus .20 for QQQ. QQQ is more liquid and thus preferred by institutional investors.

Compare: QQQ vs SPYG and IWF

There are a lot of excellent alternatives to the Nasdaq when it comes to large-cap growth. SPYG and IWF are low-cost ETFs that offer far more diversified portfolios of the best growth companies in America.

Both avoid the inherent flaw of owning just Nasdaq listed companies, but neither can match QQQ (and QQQM) for historical returns. QQQ outperformed SPYG and IWF with far higher volatility. It also kept up with the S&P 500 over the last 22 years.

If QQQ delivered market-level returns with higher volatility, then why own it?

Because its average annual return was 13.5%, which is about 35% more than its growth peers.

Even the average 15-year return of 12.6% was far better than its growth alternatives.

Performance Difference – Small vs Large Cap Tech Stocks

In the first half of 2021, concerns about overheating valuations, especially in unprofitable small- to mid-cap tech stocks, began to fuel the the widespread selloff. The trend intensified in the second half of the year when governments started ending social distancing policies.

As displayed in the chart above, large-cap stocks extended their bull run and helped the tech-heavy NASDAQ reach an all-time high in December 2021 before falling dramatically in 2022. The top five large-cap tech stocks including Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Alphabet (GOOG) (GOOGL), and Tesla (TSLA) accounted for almost two-thirds of the overall Nasdaq 100 returns. Meanwhile, 25% of companies listed on the Nasdaq index plunged around 50% from their 52-week highs.

The significant performance dispersion between large and mid to small-cap tech stocks continued into 2022. A number of non-profitable tech stocks, including disruptive tech, SPACs, biotech, IPOs, meme stocks, and others, added significantly to their losses in 2022.

SPDR S&P Biotech ETF (XBI) plunged >30% year to date while WisdomTree Cloud Computing ETF (WCLD) and Global X FinTech Thematic ETF (FINX) plunged around > 45% in the past six months. These ETFs have performed poorly due to their high concentration in loss-making small- to mid-cap technology companies.

Top Ten Holdings
Excluding Tesla, Meta Platforms (FB), and NVIDIA, the rest of QQQM’s top 10 holdings are all down only around 10 to 20% year to date.

The top ten components of the NASDAQ 100, which account for >50 percent of the total holdings, have healthy balance sheets that allow them to invest in future opportunities without resorting to external borrowing. Therefore, these companies have a good chance of recovering significantly once the broader route ends. 

Fund Performance

Year-to-date QQQM is down roughly 25%.

The Nasdaq’s forward PE is still elevated relative to its long-term average of 19. On a cashflow basis, analysis indicated that it may be undervalued between 10% and 30%.

Analysts expect almost 13% long-term growth vs 8.5% for the S&P 500 and 8.9% for the dividend aristocrats.

Currently, analysts expect 13.7% long-term total returns from the Nasdaq, which is similar to its historical returns.

Financial Metrics

Let’s take a look at how QQQ stacks up in Morningstar.

• 97% wide and narrow moat companies are exceptional as is B+ financial health.

• Free cash flow yield of 26% is very attractive, as well as the 37% payout ratio on dividends.

Conclusion

QQQM has the potential to rebound sharply once the market recovers, thanks to its concentration on large-cap tech stocks. QQQM’s low expense ratio and dividend factor make it a sound long-term investment.