If D-Wave Is Too Risky, Consider These 3 Quantum ETFs for Diversification

Key Points

• D-Wave Quantum has been on a tumultuous ride in the last month, with shares falling by 38% during that time.
• The frequently-hyped quantum name may be too turbulent for some investors, prompting them to look for ways to hedge their bets on the industry.
• ETFs with a quantum computing focus—or otherwise including some quantum names—might be a way to diversify while maintaining exposure.

After a dismal November in which shares plunged by more than 38%, D-Wave Quantum Inc. NYSE: QBTS is leaving investors focused on quantum computing wondering whether the worst is still yet to come. Signs across the industry don't look promising, with rivals Rigetti Computing NASDAQ: RGTI and IonQ Inc. NYSE: IONQ dropping by 42% and 21%, respectively, over the last month as well. Investors may have grown tired of waiting for these firms to achieve profitability, or the initial period of hype may be giving way to a more cautious environment as the technology catches up to expectations.

Whatever the reasons for the recent pullback in the quantum computing space, it's understandable if investors might be looking for a way to protect their interests while still maintaining exposure. One approach might involve diversifying across exchange-traded funds (ETFs) that include stocks representing the quantum field. A broader basket of securities can help to insulate against the negative performance of a single stock or a small group of names. The funds below each hold QBTS shares but provide some additional diversification as well.

Pure Play and Broader Tech Balance in a Brand New Fund

One of the most recent entrants to the quantum computing ETF space, the WisdomTree Quantum Computing Fund BATS: WQTM holds over three dozen stocks of companies involved in quantum either as pure players or diversified innovators, the latter combining quantum efforts with a broader business, for an expense ratio of 0.45%.

The varied approach means that, while companies like D-Wave and Rigetti represent some of the largest positions in the portfolio, more generalized tech companies like Alphabet Inc. NASDAQ: GOOGL can help to hedge against industry-specific turbulence. The fund also provides a modest amount of geographic diversification, with just under two-thirds of the portfolio covering U.S. companies and the rest distributed across firms from Japan, Canada, the Netherlands, and elsewhere.

Given that WQTM only launched in October, its performance history is very limited. Investors should also bear in mind that this fund has substantially low assets under management (AUM)—currently below $10 million—and trading volumes. This might make liquidity a challenge and could make the fund appeal to investors with a longer view of the quantum space primarily.

Quantum and Machine Learning Offer Some Diversification Advantages

The Defiance Quantum ETF NASDAQ: QTUM has a somewhat broader mandate than WQTM above, as it tracks an index of both quantum computing and machine learning firms (although there is naturally a fair degree of overlap between these industries). It has just under 80 positions in its portfolio and is not heavily weighted toward any particular names.

D-Wave makes up just 1.44% of the QTUM portfolio, so investors should keep in mind that this fund is more broadly focused than some other quantum ETFs that carry QBTS stock. In the case of the recent quantum industry dip, this could actually be to the fund's advantage: QTUM fell by under 6% in the last month, a much narrower decline than QBTS.

With an expense ratio of 0.40%, QTUM is slightly cheaper than WQTM above. It also has several more years of track record and significantly higher AUM at about $2.9 billion. The fund has a healthy one-month average trading volume of around 766,000, so liquidity should not be a concern for investors seeking to trade this fund more actively.

A View of Quantum Computing Companies Alongside Other Meme Stocks

Investors seeking to remain exposed to QBTS while taking on a much wider set of accompanying positions might look to the Roundhill Meme Stock ETF NYSEARCA: MEME. As the name suggests, this fund holds viral meme companies notable for their high degrees of popularity and volatility.

Also in existence only since October of this year, MEME is a fund for risk-tolerant investors comfortable with rapidly changing securities prices and a low asset base. Still, the ETF has strong trading volume in its short history, so it may still appeal to more active traders.

About 3.3% of MEME's portfolio is given over to QBTS shares, and other quantum firms are also present in its basket. However, this fund does not focus on quantum stocks—it also carries companies in the drone technology, cryptocurrency, nuclear energy, and satellite broadband industries, among others. There are only about two dozen companies in total, but there is no guarantee that MEME will continue to cover QBTS if its popularity declines, so investors should watch closely.