Happy birthday QQQ! The granddaddy of Nasdaq exchange traded funds celebrates its 20th anniversary today. The QQQ is an ETF that tracks the Nasdaq 100, the top non-financial stocks trading on the Nasdaq. It’s my scapegoat today for pointing out a nasty secret sitting your portfolios – you own too much tech.
Let's discuss QQQ itself for moment: Because it’s market cap weighted, QQQ like other cap weighted funds, ends up piling into a few stocks. The fund, officially named the Invesco QQQ after its sponsoring fund company – owns 103 stocks right now. Great! But almost 43% of its assetssit in just five companies: Microsoft, Apple, Amazon, Facebook and Alphabet – the latter in both publicly traded classes of the Google-parent’s stock. Not so great – for most folks at least.
QQQ is the sixth largest ETF overall and the biggest that tracks the Nasdaq 100 index. It has $66 billion in assets, by far the largest equity fund tracking the index, and has enjoyed really fine returns. Lifetime net asset value has returned 7.49% a year – which is impressive consider its first few years were the stomach churning losses of the dotcom bust. Annual returns have been in the double digits during this bull market. But being heavily invested in a few names has a downside. For one, a group of companies that are more similar than different will likely suffer similar fates if tech stocks turn bearish. That's no good. But it's probably even worse for your portfolio than you think. How's that? Do you own any other ETF or mutual fund that invests in American companies? I bet you do and odds are you already own enough of what QQQ offers. That’s because those tech giants are also in the top holdings of other popular market cap weighted funds, primarily the S&P 500.
Looking at the top 4 largest ETFs in the world, all of which invest in U.S. stocks, three are S&P 500-based funds – SPY, IVV, VOO – and one is a total market fund, VTI. According to data as compiled by the website ETFdb.com – this group has $600 billion in assets, representing a good chunk of the more than $3.5 trillion in ETF assets held in the U.S. In those four large ETFs more than 14% – $89 billion – is held in Apple, Amazon, Facebook, Google and Microsoft. Not great diversification.
One suggestion: buy non-market weighted index funds or look underneath the hood of each fund you buy to avoid too much overweighting. It’s a bit of work though – index designers and fund managers love large cap stocks because they’re popular names that have gotten those big valuations from strong past performance. There is safety in owning the past winners everyone knows. Just look at some other well-known ETFs: The iShares Russell 1000 fund, for instance, has more than 26% in our big five. The Vanguard Information Technology Fund, which is aimed to be a broader technology play, has 29% of its portfolio in just Apple and Microsoft. You’ll find big investments in all or some of these names even where you may not expect them. Vanguard’s Dividend Appreciation ETF has about 5% in Microsoft, for instance. Even iShares’s investment grade corporate bond ETF, LQD, has almost 5% of its holdings in the bonds of Apple, Microsoft and Amazon.
If you’re like most people, you want funds to do the heavy lifting of providing diversification and portfolio management for the long term. Ideally, you shouldn’t have exposure to more than 3% to 5% of any one stock in your portfolio, under typical (though admittedly debatable) rules of thumb around long-term diversification. All that overweighting in the tech names we all know and (sometimes) love has worked just fine this bull market. That may not be the case when the market turns, whenever that may be.
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