It's not a stretch to say plenty of investors are hearing about the indomitable rise of the Nasdaq-100 Index (NDX) this year. However, this isn't merely a 2020 theme. It's a multi-year trend that, particularly with growth stocks in favor, shows little sign of abating.
For the three years ending Sept. 16, NDX is higher by 93.4 percent, more than doubling the returns of the S&P 500 over that period. Home to storied names such as Apple (AAPL), Amazon (AMZN), Facebook (FB) and Microsoft (MSFT), among others, the Nasdaq-100 is one of the most widely followed equity benchmarks in the world, but many investors may wonder from where the index's components hail.
The answer is easy: The Nasdaq Q-50 Index (NXTQ) is a “minor league” of sorts for stocks that are viable candidates for future admission into the Nasdaq-100. Thanks to the recent launch of the VictoryShares Nasdaq Next 50 ETF (QQQN), investors have an avenue for accessing the Q-50.
“The Index is comprised of 50 securities ranked by market capitalization and reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade, and biotechnology,” according to Nasdaq Indexes. “It does not contain securities of financial companies including banking and investment companies, as these are ineligible for Nasdaq-100 Index inclusion.”
Minor League, Major League Potential
Using baseball vernacular, the Q-50 Index can be seen as the AAA ball to NDX's major leagues. That's not a slight, because the smaller index can deliver its own impressive returns, potentially making QQQN a rewarding, long-term idea.
The Q-50 Index debuted October 2007 and for the 13 years ending 2019, the benchmark delivered just four negative annual performances, two of which averaged out to a third of a percent. Conversely, the index delivered five annual gains in excess of 30 percent during that span.
Currently home to 48 stocks, the Q-50 Index is comprised mainly of companies residing at the smaller end of large-cap or stocks that meet the definition of mid cap, making both traditional large- and mid-cap exchange traded funds relevant comparisons for the newly minted QQQN. The average market capitalization of the rookie fund's components is $19.7 billion.
From April 30, 2009 to April 30, 2020, the Nasdaq Q-50 outperformed the S&P 500 by 232.64% on a price return basis, in addition to its mid-cap cousin, the S&P MidCap 400 Index, by 272.93%,” according to Nasdaq Indexes research.
Courtesy: Nasdaq Global Indexes
The trend of outperformance is continuing this year as Q-50 is higher by almost 18 percent, beating the S&P 500 by a margin of more than 3-to-1.
Past performance is never a guarantee of future returns, but that old saying doesn't diminish the case for QQQN for multiple reasons. First, identifying the next wave of innovators via individual stock picking is difficult. QQQN solves for that. Second, when stocks transition from a smaller index to a more widely followed benchmark, as plenty of QQQN holdings will over time, they usually rally.
QQQN is, in fact, levered to the theme of innovation as about two-thirds of its holdings are technology or healthcare stocks.
Additionally, the fund is approachable for a wide audience of investors because it charges just 0.18 percent per year, or $18 on a $10,000 investment. Low fees and unique offerings are meaningful for new ETFs and QQQN checks those two crucial boxes. That could explain why the VictoryShares is just a week old and is already approaching $22 million in assets under management.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.