What is the QQQ ETF?

Monday, January 28, 2019 | MarketBeat Staff
What is the QQQ ETF?

Summary - The QQQ ETF is an index fund that features a tiered weighting system that focuses on market capitalization making it one of the most popular index ETFs. One of the distinguishing features of the QQQ ETF is its weighting methodology that makes it heavy in technology stocks including all of the FAANG stocks. The rules of the QQQ ETF do not permit it to invest in financial stocks. In fact, after tech stocks, it only invests in six other sectors. Consumer discretionary has the second most weight. These stocks are known for growth as well as the opportunity for a healthy quarterly dividend.

In recent years, the 18-year old QQQ ETF has received competition from other financial products including leveraged ETFs that include the ProShares UltraPro QQQ (also known as the TQQQ ETF). The biggest distinction for investors is that the TQQQ uses derivative instruments and debt in an attempt to generate outsize returns. While this can be appropriate for active traders and investors who have a high-risk tolerance, it is not appropriate for investors who are looking to practice a buy-and-hold strategy.

While no investment is completely without risk, the performance of the QQQ ETF has received high rankings from analysts, helping to make it one of the safer choices among ETFs.


30 years ago, exchange-traded funds (ETFs) were considered to be a far inferior alternative to the then-burgeoning mutual fund. However, in recent years, ETFs have become far more popular. One of the reasons for this is that they trade more like stocks, which allows investors to get the benefits of investing in a particular group or sector of stocks but being able to execute their trades without the delay involved in mutual fund trading.

One of the most popular ETFs is the QQQ ETF also known as the PowerShares QQQ. This fund tracks the Nasdaq 100 Index and features a unique weighting methodology that puts a heavy emphasis on technology stocks. For investors looking for broad exposure to many of the most popular technology stocks, they would do well to consider the QQQ ETF.

This article will define the QQQ ETF and show how the ETF is different from the TQQQ ETF (a leveraged ETF). We’ll also review how an ETF is different from a mutual fund or exchange-traded note (ETN).

What is the QQQ ETF?

The QQQ ETF is also known as the PowerShares QQQ. This is one of the most widely held and traded exchange-traded funds (ETF). One reason for its popularity is that it tracks the Nasdaq 100 Index, which is populated by 100 of the largest U.S. and international companies (based on market capitalization) that are traded on the Nasdaq stock exchange. A defining feature of the Nasdaq is that it is the home of many companies in emerging markets, including technology companies. In fact, the Nasdaq is home to the widely popular FAANG stocks (Facebook, Alphabet, Apple, Netflix, Google) and all but Netflix are in the top 10 of their holdings as of this writing.

However, the QQQ ETF is also considered to be an unusual, albeit exciting, fund based on its composition and the way the fund assigns weight to its holdings. According to the rules established when the fund was created, the fund excludes financial companies. In fact, the QQQ ETF is concentrated in seven sectors that are weighted as follows*:

  • Information technology – 59.49%
  • Consumer discretionary – 21.69%
  • Health care – 9.04%
  • Consumer staples – 5.95%
  • Industrials – 2.64%
  • Telecommunication services – 0.85%
  • Utilities – 0.34%

*As of 1/24/19

The fund also uses a weighting system that is concentrated on its largest holdings which means it has significant exposure to the technology sector, including some of the largest and most innovative companies. For example, Apple recently had a market cap that was briefly over $1 trillion and is still around $900 billion. Google, Microsoft, and Amazon continually show strong operational cash flow. Amazon, in particular, has shown quarter after quarter of strong top-line revenue numbers.

  • com, Inc. – 10.05%
  • Microsoft Corporation – 10.02%
  • Apple, Inc. – 9.02%
  • Alphabet Inc. Class C – 4.69%
  • Facebook Inc. Class A – 4.41%
  • Alphabet Inc. Class A – 4.12%
  • Intel Corporation – 3.02%
  • Cisco Systems, Inc. – 2.72%
  • Comcast Corporation Class A – 2.21%
  • PepsiCo, Inc. 2.11%

However, despite the rules that define the fund's holdings and how they are weighted, the QQQ ETF is not considered a "tech fund". It provides investors with exposure to tech, large-cap, and growth stock companies. With that said, the fund's top 10 holdings currently make up 52.37% of the fund's holdings as of this writing.  

In addition to its focus on some of the most innovative, and rapidly growing, companies, the QQQ ETF also has a very low expense ratio (currently around 0.2%).

What is the difference between the QQQ ETF and the TQQQ ETF?

As you can imagine, the QQQ ETF isn’t the only player that seeks to profit its investors by investing in the technology sector. And while the PowerShares QQQ, at 18 years old, is considered to be one of the giants in the sector, it can seem downright vanilla when compared to the flavor portfolio of some other ETFs that have arisen in the sector. One of these is the ProShares UltraPro QQQ or the TQQQ ETF. TQQQ was created as a way to give investors a more exotic way to trade the Nasdaq 100 index.

The objective of the TQQQ ETF is to deliver three times the daily return of the Nasdaq 100 index. This means that if the index climbs 1% on a trading day, the TQQQ should, in theory, rise by 3%. What allows the TQQQ to target gains of this size is that it is a leveraged ETF, which means that it uses financial derivatives and debt to significantly increase the returns of the underlying index that it trades.

For an investor, the choice of choosing one fund over the other really comes down to their investment philosophy. The TQQQ ETF seeks to capitalize on the momentum of a stock and relies on a high degree of volatility in price movement. Therefore it is geared towards active traders who have a high-risk tolerance. By contrast, the PowerShares QQQ is more suited for long-term "buy-and-hold" investors. With one fund, the investor has exposure to a highly liquid, cost-efficient fund that features a mix of large-cap innovative companies weighted to the tech sector.

And for investors who are concerned about fees and expenses, the TQQQ has an expense ratio much closer to 1% which is typical for leveraged ETFs, compared to the 0.2% expense ratio of the QQQ.

How is the QQQ ETF different from a comparable mutual fund index?

A high percentage of exchange-traded funds have a mutual fund counterpart that trades the same sectors or securities. The QQQ ETF is no different. The Invesco QQQ Trust Series 1, for example, is a mutual fund that trades the Nasdaq 100.

ETFs and mutual funds share certain characteristics in terms of allowing investors to hedge against risk by spreading out their investment among a variety of companies. In the case of the QQQ ETF, many of these companies are in the technology sector which many investors would like to be active in, but may be concerned about the risks involved. However, while a mutual fund and ETF may be related, there are distinctly different.

Although there are differences in the way the funds are set up, the difference we want to focus on for the purposes of this article is the trading process between the QQQ ETF trades and a mutual fund index. In the case of a mutual fund, the price of the fund (and therefore the price investors shares are bought and sold at) is not set until the end of a trading day when the fund’s net asset value (NAV) is determined. By contrast, and ETF trades shares are created and subsequently redeemed by large institutional investors. Shares in the QQQ ETF, as with other ETFs trade throughout the day just like an equity stock. An ETF can also engage in short selling. In fact, the QQQ ETF has a companion ETF the ProShares Short QQQ that exists for just that purpose.

ETFs also have lower fees and expenses than mutual funds, particularly mutual funds that are actively managed. The QQQ ETF has an expense ratio of just 0.2%, which is another reason why it is popular among competing products.

How is the QQQ ETF different from an exchange-traded note (ETN)?

An ETF and an ETN are related much in the same way that a convertible note is related to convertible preferred shares. The ETN is called a structured product and acts more like a bond because they are issued as unsecured, senior debt notes. ETFs, by contrast, represent an actual stake in their underlying security (stocks, bonds, gold, etc.).

An ETN is similar to a prepaid contract. For an investor, this means that when they buy or sell the difference will be treated as capital gains. ETFs on the other hand base their return on the interest from Treasury bills, short-term capital gains (calculated on the rolling of futures contracts) and long-term capital gains.

There is also a difference as it applies to the way ETNs and ETFs are taxed. In general, ETNs should be more favorable because short-term capital gains are treated less favorably than long-term capital gains. However, with an ETN, income taxes will have to be paid on any interest or coupon payments made by the ETN. This can be compounded for international investors because capital gains are treated differently in their home countries.

Another distinction between an ETN and ETF has to do with credit risk. If the issuer of an ETN would go bankrupt, there is no guarantee that an investor would receive their promised return. By contrast, an ETF possesses a virtually non-existent credit risk. However, owners of an ETF face the risk that their return could fall below the underlying index.

Is the QQQ ETF safe?

All investing involves a certain degree of risk and the QQQ ETF is no different. One measure to measure a fund’s safety level is to assess its quality. MSCI ESG Research LLC assigns funds a quality score and a peer rank that can help investors see where the fund stacks up to its peers and compared to other funds that trade in comparable sectors. The QQQ ETF had a quality score of 5.72 out of 10. The ETF ranked in the 88thpercentile within its peer group and in the 57thpercentile for all ETFs.

In addition, the QQQ ETF has been in the top 1% of the Morningstar's Large Growth category for the past 5 and 10 years*. Morningstar's ratings are based on a risk-adjusted return measure. This means that when calculating monthly performance, more emphasis is placed on downward variations and funds that produce consistent performance are rewarded. The overall rating is calculated using a weighted average of three-, five- and 10-year rating metrics, as applicable. The rating excludes sales charges but includes fees and expenses.

The final word on the QQQ ETF

Exchange-traded funds have become one of the more popular financial products. While some investors and analysts deride the concept of a fund that trades like a stock, it has become very popular among investors who are looking for the flexibility to trade their funds on a stock exchange in the same way they would trade individual stocks. Of course, one of the attractive features of an ETF is that, like a mutual fund, it gives investors exposure to a basket of securities – allowing them to broaden their risk while still having exposure to some of the top stocks.

To this end, the QQQ ETF gives investors exposure to the tech sector with a unique weighting system that currently gives investors large exposure to tech stocks like the FAANG stocks. Like any investment, the QQQ ETF can make no guarantee about its future performance, but it is recognized among analysts for its outstanding performance over a 5- to 10-year period. 

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