With so much uncertainty over the global economy, and rising volatility in the U.S. stock market, a lot of investors are shying away from individual stocks in favor of exchange-traded funds. One of the most popular ETFs is QQQ, which tracks the Nasdaq 100 index. An ETF that has similar holdings but weighted a different way is the QQQE.
We are going to take a closer look at these two ETFs and compare the returns that investors have experienced with each.
With the Nasdaq being so heavily weighted with technology stocks, ETFs that track the Nasdaq tend to also be more heavily weighted in technology stocks. PowerShares QQQ (QQQ) is one such ETF. In fact, over 50% of QQQ's holdings are technology companies.
The ten largest holdings of QQQ make up over 55% of the total ETF, with its Apple position accounting for 16% of the ETF and Microsoft another 9%. While this is great for investors that want to diversify across technology stocks, its overall diversification leaves a little to be desired.
Realizing that some investors who want to play the Nasdaq might prefer less exposure to the heavyweights of the tech sector, last March Direxion launched the NASDAQ-100 Equal Weighted Index Shares (QQQE). This ETF still holds the stocks in the Nasdaq 100, but instead of Apple accounting for 16% of the fund's holdings, each stock accounts for 1% of the funds holdings.
A couple of advantages of QQQE over QQQ:
- Less top heavy since the top ten Nasdaq 100 companies represent just 10% of its holdings, versus 55% in the QQQ
- Smaller and mid cap stocks gets a greater allocation
- Less exposed to changes in the technology sector
A perfect example of the added stability investors enjoy with QQQE can be seen in the recent selling pressure that Apple has experienced. As AAPL shares sold off, QQQ moved in a similar fashion. Investors who got into QQQ in order to diversify their portfolio learned the hard way that they were still heavily exposed to Apple.
QQQE on the other hand, did not experience such a dramatic drop in price.
Which of these ETFs are better for you depends on your investing goals. If you want to play the Nasdaq solely because of the heavy tech weighting, then QQQ is your better investment. However, if you prefer a more diversified investment across the entire Nasdaq 100 then you would be better off going with QQQE.
Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va. His articles typically cover big-picture events and forecasting what impact they will have on the stock market. In addition to writing for Fresh Brewed Media, Michael also wrote for AOL's BloggingStocks for three years, focusing most of his attention on the energy and technology sectors. Follow him on Twitter at @MFatMICenter.