Play New Small-Cap ETF (QQQS) to Bet on High-Quality Patents

A patent gives a company the right to stop others from copying, manufacturing, selling or importing its invention without permission. Per Morningstar, sometimes patents are a source of prolonged competitive advantage for a company, although not all patents result in narrow or wide economic moat. If patents protect a company's main products, and there are no other options, then the company may have pricing power for a sustained period while other industry players legally face barriers to entry.

Invesco has recently brought about a new small-cap ETF that relies on patent portfolio. Below we highlight Invesco NASDAQ Future Gen 200 ETF (QQQS) in detail.

QQQS in Focus

QQQS provides access to small-cap companies with promising patent portfolios relative to their total market value as deemed by Nasdaq. Valuable patents help companies to gain competitive advantages and garner likely revenue growth. The Invesco NASDAQ Future Gen 200 ETF is based on the Nasdaq Innovators Completion Cap Index. The fund will invest at least 90% of its total assets in the securities that comprise the index. Healthcare (55.65%) and Information Technology (30.51%) are the top two sectors of the fund.

The fund holds about 199 stocks in total. The eligible universe consists of the companies within the Nasdaq Composite Index, barring those companies included on the Nasdaq-100 Index and Nasdaq Next Generation 100 Index. Each constituent within the index is equally weighted. The fund charges 20 bps in fees. No stock accounts for more than 1.10% of the fund.

How Does It Fit in a Portfolio?

Apart from competitive advantages in the same business, a strategic patent portfolio improves valuation of the company and puts that company in an advantageous position during M&A deals. Higher revenues generated from those patents also make up for the high R&D costs incurred by those companies in building those patents.

In the current economic doldrums created by high supply-chain-induced inflation and rising rates, exposure to quality companies is warranted. The broader market is sharply down this year and may remain subdued next year if the Fed continues to hike rates and the economy tips into a recession.

Rising rates are negative for growth sectors like technology and biotech. The fund QQQS is highly-focused on these two sectors. Investors should note that only high-quality tech and biotech companies are likely to sail through in the current environment. Small- caps appear even better bets as these are domestically-focused and do not get hurt by a rising greenback.

Can QQQS See Success?

We expect QQQS to taste quick success as the investment objective is pretty innovative. The issuer has been quite successful in the ETF industry. Its previous products including Invesco QQQ Trust QQQ, Invesco NASDAQ Next Gen 100 ETF QQQJ and Invesco NASDAQ Next Gen 100 ETF QQQM have generated huge assets. QQQ, QQQJ and QQQM have an asset base of $145 billion, $750 million and $4.53 billion, respectively. Hence, we expect QQQS to make a killing.

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Invesco QQQ (QQQ): ETF Research Reports
Invesco NASDAQ Next Gen 100 ETF (QQQJ): ETF Research Reports
Invesco NASDAQ 100 ETF (QQQM): ETF Research Reports
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Zacks Investment Research

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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