Big Shoes to Fill, But This New ETF Has the Goods

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In the pantheon of exchange traded funds, one that is indeed growing as the industry evolves, there are lots of great stays, but a far smaller amount of legends.

For the purposes of this conversation, I'll classify a legendary ETF has one that has $100 billion or more in assets under management, a status currently sported by just five ETFs, one of which is the Invesco QQQ (QQQ).

QQQ, which tracks the famed Nasdaq-100 Index and turns 22 years old in March, has more than $131.1 billion in assets under management, an advantage of $50 billion over the sixth-largest ETF. Beyond heft, QQQ and the Nasdaq-100 are legends for more important reasons, not the least of which is sheer performance.

Between Dec. 31, 2007 and June 30, 2020, the Nasdaq-100 Total Return (TR) Index, which accounts for reinvested dividends, returned a staggering 456 percent compared to 175 percent for the S&P 500 TR. The Nasdaq benchmark's average annualized returns were 630 basis points superior to those offered by the S&P 500 with comparable volatility.

Why It's Important

Talking about QQQ is a good segue to getting acquainted with one of its new stablemates, the Invesco NASDAQ Next Gen 100 Fund (QQQJ).

Nearly a month old, QQQJ tracks the NASDAQ Next Generation 100 Index, a benchmark that's essentially a proving ground for admission to the aforementioned Nasdaq-100. This is a strategy ETF issuers are finding success with one introducing a fund earlier this year focusing on the “next 50” or the 50 stocks closest to entry into QQQ and the Nasdaq-100.

For its part, QQQJ is finding swift success. At less than a month old, it has nearly $136 million in assets under management, making it one of the stars of this year's crop of new equity-based ETFs while confirming the cache of being related to QQQ.

The NASDAQ Next Generation 100 Index, QQQJ's underlying benchmark, is a new index, having debuted in August and while backtesting isn't always flawless, it does turn up some positives in the case of index. Backtesting QQQJ's index to Dec. 17, 2010 through Sept. 30, 2020 indicates returns of 271 percent compared to 209 percent for the Russell Mid Cap Growth Index and 106 percent for the S&P MidCap 400 Index, respectively.

Comparing QQQJ to mid-cap ETFs and indexes is relevant because many of the fund's components are classified as mid caps are smaller large caps. For example, the fund's largest holding is cloud computing name Okta, Inc. (OKTA), which has a market capitalization of $30.50 billion (as of Nov. 5), putting it at the smaller end of large-cap territory.

Really Disruptive, Innovative

One of the primary factors in QQQ's success is the Nasdaq-100 historically featuring larger weights to truly disruptive, innovative companies than are found in rival domestic equity benchmarks. As just one example, Tesla (TSLAis the seventh-largest holding in the Nasdaq-100 at a weight of almost 3.30 percent while it still isn't included in the S&P 500.

The tradition of providing exposure to innovative names continues in QQQJ. Data confirms as much, For example, QQQJ components are likely to allocate two or three times more of their revenue to research and development than companies in traditional in mid-cap indexes.

“Patent exposure metrics better than midcap benchmarks as well, with 38% of index constituents registering patent activity in one or more Disruptive Tech sub-themes over a recent 12-month period,” according to Nasdaq Research. “Not only are NGX constituents more likely to file patents than midcap benchmark peers, they also tend to file them in more areas of innovation, on average 3.7 sub-themes per active company.”

Bottom line: QQQJ may live in QQQ's shadow for awhile, but it has the potential to overshadow more prosaic approaches to mid-cap stocks.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Todd Shriber

Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and

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