- Last week, the Invesco QQQ Trust (QQQ) crossed the $100 billion in assets mark, joining three S&P 500-based ETFs and a total stock market offering from Vanguard.
- While thought of as an information technology ETF, more than half of QQQ’s assets are from other sectors. CFRA finds many of the stocks inside to be attractively valued and having underappreciated earnings potential.
- CFRA thinks it could be three or more years before another fund joins the $100 billion club given competitive pressure and modest returns for bond funds. But actions by the Federal Reserve could boost one fund into the upper echelon.
QQQ Joins $100B Asset Club
QQQ reached the $100 billion assets under management threshold last week, according to ETF data from First Bridge, aided by a 12% total return in the past month and a strong $9 billion of net inflows this year. The fund is the fifth largest ETF, behind the SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV), Vanguard Total Stock Market ETF (VTI) and Vanguard S&P 500 ETF (VOO). However, QQQ is quite different from its larger ETF peers. QQQ tracks the Nasdaq-100 Index and is known to many as a technology ETF despite what is inside.
As of early May, QQQ had only 47% in information technology stocks, with 21% in communication services, 16% in consumer discretionary, 8% in health care and a smattering in consumer staples, industrials, and—yes—utilities companies.
While this is much more tech exposure than the 26% for SPY, the largest ETF, with $260 billion in assets, the weighting is only moderately larger than the 39% for the iShares S&P 500 Growth (IVW) and 40% for the iShares Russell 1000 Growth (IWF). An additional difference between QQQ and these growth funds is the absence of financial stocks.
QQQ Outperformance Expected
CFRA rates QQQ as a five-star diversified U.S. equity fund, believing it has a high probability of outperforming in the next nine months due to its low costs and high reward potential, despite slightly elevated risks.
QQQ is concentrated in a handful of mega-cap securities, but ones that are attractively valued and have understated earnings potential. CFRA has Buy recommendations on Microsoft (MSFT), Apple (AAPL), Amazon.com (AMZN) and Facebook (FB), the four largest holdings, and Strong Buy recommendations on Alphabet (GOOG.L) and PepsiCo (PEP).
These and many other positions earn favorably low CFRA Earnings Scores based on their accounting practices. The ETF charges a 0.20% expense ratio and trades in line with its net asset value.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Other Funds Trail In Assets
iShares, State Street Global Advisors and Vanguard each have an ETF among the next five largest funds, but it could be three years or longer before one hits $100 billion. The iShares US Core Aggregate Bond (AGG) has $71 billion in assets, making it the sixth largest ETF, but it experienced slight outflows so far in 2020. While the fund was up 4.5% year-to-date through May 8, the investment-grade bond fund is unlikely to rise as sharply as larger equity ETF alternatives.
Indeed, in the past 12 months, the Vanguard Total Bond Market ETF (BND), the tenth largest ETF, gathered $10 billion in new money, more than double the $4.5 billion for AGG. While CFRA thinks investors should go beyond expense ratios to choose a fund, BND charges 1 basis point less. We think investors seeking core bond ETF exposure will continue to split between AGG and BND, limiting the potential asset growth.
Battle Between Vanguard & iShares
The Vanguard FTSE Developed Markets ETF (VEA) and the iShares Core MSCI EAFE ETF (IEFA) have $65 billion and $61 billion in assets under management, respectively. While they both provide exposure to developed markets, there are modest differences between them. Recently, VEA had an 8% stake in Canada and a 4% stake in South Korea, two markets that are not represented in IEFA.
In years past, the exposure played a role in performance, but both funds were down 18% in 2020, as much of the world has been hurt by COVID-19 concerns in a similar manner. Yet in the past month, even as VEA and IEFA have risen in value, demand for international equity ETF exposure has shrunk. Combined, the pair have seen approximately $3 billion in net outflows.
GLD Outshines Other Heavyweights
Meanwhile, the fastest asset gatherer among the $50 billion-plus club in 2020 is the SPDR Gold Trust (GLD). The commodity ETF was up 12% in 2020 and gathered $10 billion in net inflows to push its asset base to nearly $60 billion.
CFRA Equity Analyst Matthew Miller thinks the fundamentals for gold remain strong, as the COVID-19 pandemic and the depressing reality of its economic damage has led to an unprecedented amount of quantitative easing across the globe.
However, GLD’s 0.40% expense ratio is much higher than that of the iShares Gold Trust (IAU) and the SPDR Gold MiniShares Trust (GLDM), which charge 0.25% and 0.18%, respectively. IAU and GLDM gathered more than $4.5 billion in new assets so far in 2020. We think retail-oriented investors will be more focused on the expense ratio than GLD’s higher trading volume.
Don’t Fight The Fed’s ETF Buying
The iShares iBoxx $ Investment Grade Corporate Bond (LQD) is a dark horse in the race to reach $100 billion, as the fund’s $45 billion asset base swelled by $10 billion this year and $3.3 billion in the past month. CFRA thinks the 16th largest ETF provides strong reward potential with limited risk through exposure to corporate bonds rates BBB and above.
However, recent demand has emerged ahead of the Federal Reserve’s likely purchase of corporate bonds and highly liquid corporate bond ETFs. Though there are limitations to the Fed’s ETF purchases, such as the premium and ownership stake allowed, investors are likely to see the strong flows and improved performance and join in buying the funds.
While QQQ reached the $100 billion threshold, CFRA thinks the fund will continue to swell in size as the stocks inside remain appealing. However, the next wave of ETFs to hit the milestone could take years, as leading core bond, developed international equity and gold ETFs face competition. Those looking for an outside-the-box candidate might want to focus on what the Federal Reserve buys as it kicks off its ETF program.
All of the views expressed in this research report accurately reflect the research analyst’s personal views regarding any and all of the subject securities or issuers. No part of the analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information, please refer to CFRA’s Legal Notice at https://www.cfraresearch.com/legal/.
Copyright © 2020 CFRA. All rights reserved. All trademarks mentioned herein belong to their respective owners.