QQEW ETF: May Be Poised To Finally Get A Win Versus QQQ (NASDAQ:QQEW)

By Rob Isbitts

Strategy

First Trust NASDAQ-100 Equal Weighted Index Fund (NASDAQ:QQEW) is an ETF created and managed by one of the top-tier ETF firms, First Trust Advisors L.P. It holds every stock in the Nasdaq 100 Index. However, in stark contrast to the better-known QQQ, which weights the Nasdaq 100 by company size (i.e., market capitalization), QQEW assigns an equal weight to every stock. Given the nature of stocks in the Nasdaq 100 Index, QQEW has a strong growth stock tilt.

Proprietary ETF Grades

• Offense/Defense: Offense

• Segment:Broad Equity

• Sub-Segment:US Large Cap

• Risk (vs. S&P 500):High

Holding Analysis

As the name says, QQEW holds 100 stocks. However, it is interesting to see how this equal-weighted version of the Nasdaq 100 compares in structure and allocation to the more popular version of the Nasdaq. Technology stocks make up 35% of QQEW, a far cry from the dominant 47% tech weighting of QQQ. QQQ’s 2 other significant sector allocations (Communication Services at 16% and Consumer Cyclical at 14%) are more similar to their respective 11% and 16% weightings in QQEW. The equal-weighted QQEW also has a 9% weighting in Industrials, versus about half that for QQQ.

Strengths

What is a strength versus a weakness all depends on the following question: “how do you prefer your Nasdaq 100?” FAANG stock fans will be disappointed to learn that QQEW’s top 10 holdings make up only 11% of assets. And given the regular rebalancing of holdings that occurs here, that will drop back to 10% on the next occurrence of that mandated process for QQEW. With QQQ allocating a whopping 49% to its 10 largest holdings, it is as if those 2 ETFs never met each other. Maybe it is not a “separated at birth” type of situation. But the holdings are the same and the weightings are different.

Weaknesses

One look at the chart below, with QQQ outperforming QQEW by 240% over the past 16 years, and a long-term holder of QQEW could be excused for thinking “QQ….EW!”

But frankly, investors can find out a lot about their risk tolerance and tendency to get FOMO (fear of missing out) if they are lamenting that an equity ETF “only made” 379% in 16 years.

There is also the possibility that FAANG will dominate forever. After all, QQQ has its own TV commercial. That’s how popular it is! QQEW doesn’t have a commercial. It doesn’t even have a radio commercial (at least, I don’t think so).

Opportunities

To me, if there was ever an era where that lower reliance on a small number of huge tech companies could reward investors, we are approaching one. As the old Wall Street expression goes, trees don’t grow to the sky. Though it looked like that for the past decade.

This chart doesn’t scream “comeback” for QQEW versus QQQ. But that’s not why I included it. These long-term cycle shifts don’t happen in a week, month or year. But for investors who like “the Nasdaq” because of the nature of the 100 stocks, and not simply the top 15 or 20, this ETF should be an intriguing one to investigate.

That said, I believe that the past decade’s performance is unlikely to be repeated. And, while the Nasdaq 100 is ultimately due for a more severe decline before this bear cycle is over, it is not too early to get familiar with other ways to express a penchant for Nasdaq 100 investing.

Threats

If there is anything about the pulse of today’s investor population that is beating very loudly to me, it is over-reliance on past returns. One cannot buy an ETF today and get those returns. That is the only guarantee of past performance. If you didn’t own it, you can’t have it! So my fear with ETFs like QQEW is that investors will simply dismiss it as inferior to QQQ due to past performance. Ask a longtime bond investor about past performance, after 2022. This era is remarkably different in many ways from anything we have seen in the past, so QQEW and other equal-weighted ETFs should be reconsidered with a more open mind than I suspect many investors are willing to do. So to me, the biggest threat with QQEW other than the obvious stock market nature of it, is that investors won’t pay attention to it, just at the time they should be checking it out.

Proprietary Technical Ratings

• Short-Term Rating (next 3 months):Hold

• Long-Term Rating (next 12 months):Hold

Conclusions

ETF Quality Opinion

This is a $1B ETF that trades about $10mm a day in volume. That is a lot, except when you compare it to the FAANG-heavy, market cap weighted Nasdaq 100 ETFs. This one also carries a heavier Expense Ratio (0.57%), but as opposed to most in my industry, I am far less concerned about that. After all, if you see potential to at some point outperform by many times that Expense Ratio, it is not a significant factor.

ETF Investment Opinion

QQEW gets a Hold rating from me, for now. I am watching it as a potential upgrade candidate, but we’ll need more than the occasional bear market rally to turn my technical indicators more positive.