Inside the QQQ ETF: Investing in Nasdaq 100 Firms that Focus on R&D
Ric Edelman: I’m very happy to bring on to the program. Ryan McCormack. Ryan is the Factor and Core Equity ETF Strategist representing Invesco's flagship ETF, Invesco QQQ. Ryan, great to have you on the program.
Ryan McCormack: Thanks, Ric. Great to be back.
Ric: You probably know Ryan. He's quoted often in The Wall Street Journal, and the Financial Times. He speaks at conferences all around the country. And not only have you probably heard of Ryan, but you definitely have also heard of Invesco QQQ. Everybody knows about this because if you ever watch CNBC or Bloomberg or pretty much any sporting event, anywhere, you see QQQ splashed everywhere. So Ryan, let me just start there. Although everybody has seen the ads for Invesco QQQ, I suspect a lot of folks really don't even know what that is. So give us a real quick rundown. Remind everybody, what is the Invesco QQQ?
Ryan: Yeah, happy to. And I always joke that I challenge you to go about 3 minutes on CNBC without seeing a QQQ ad. But for a little added context, so QQQ tracks the Nasdaq 100, which is an index that's comprised of the 100 largest companies listed on the Nasdaq Exchange (except for financial-oriented stocks). QQQ has a 23-year track record. It's the fifth largest ETF listed and the second most actively traded. So very well known in the financial community. And now we're trying very hard to expand our reach to showcase to the individual investors as well.
Ric: You know, there aren't very many brands that are known throughout the world and have a huge high name recognition. You know, you can think of McDonald's and Hershey's, you can think of Ford. I think Invesco QQQ is up in those ranks. It's one of the few ETFs where everybody, even those who don't know much about ETFs have heard of QQQ. Part of it is the unique name itself, the fact that it goes by the ticker symbol QQQ. We often refer to it as the Qs, so it's got a unique positioning in the marketplace and the fact that it's the fifth largest what is it, $200 billion in assets now?
Ryan: Just about, yeah.
Ric: So it certainly has the name recognition that is the envy of the ETF marketplace. But you mentioned that it is the top 100 stocks of the Nasdaq. Nasdaq is well known for being an innovation index. It is largely technology stocks, not exclusively, but largely. And so is that really the whole point is that the message that Invesco is trying to convey is that if you want to invest in technology, stocks and innovation, the Qs is a way to go do that.
Ryan: Yeah, I think absolutely. And I think there is still that misnomer what you were alluding to, right, that QQQ is just a technology fund. And to your point, Ric, you know that the lion's share of the allocation is in technology stocks, but, you know, you are getting exposure to communication services stocks to consumer discretionary stocks, to some differentiated healthcare names. I work with my colleagues at Nasdaq very closely. And I always ask them, why do these innovative and forward leaning companies consistently list on Nasdaq? Ultimately, it boils down to one question: What do you want to be when you grow up? Do you want to be an Apple and a Microsoft, or would you rather be a G.E. or JPMorgan? And I think that's what consistently attracts these sorts of companies to list on the Nasdaq exchange.
Ric: So how do you evaluate if a company is truly dedicated to innovation? How do you know that they're serious about this?
Ryan: Yeah. So, innovation is a little bit of a nebulous term. From our perspective, we think the first stop is research and development. What we found is Nasdaq 100 companies consistently spend more on research and development than companies in competing indices. For instance, calendar year 2021, on a weighted average basis, the Nasdaq 100 companies spent over $13 billion on R&D compared to the S&P 500 at $7.7 billion. So what we see is this consistent commitment of these companies to reinvest in their business. And when you look at R&D generally, that's a longer-term story. You don't just throw money at it at an R&D project and say, hey, this is going to be, you know, additive to earnings next quarter or even next year. In many cases, this is a multi-year commitment that these companies are making, building out infrastructure, researching the ideas and cultivating that end product. So, it's not an easy commitment. It's longer term in nature. But what we found is that these Nasdaq 100 companies are committed to it.
Ric: But that's a bit of a challenge for a lot of these companies. That’s because if you're going to engage in massive investment into R&D to develop new innovations, it can be years before that gets proved out, before you actually have a product or service that you can bring to the marketplace and make money. And Wall Street has this culture of short termism - what have you done for me lately? Every three months, they've got to do a quarterly update with their analysts talking about how much money they're making at the moment. So if they're making big investments that might not pay off for years, Wall Street might punish them in the short term.
Ryan: You're absolutely right, Ric. When you look at some of the conference calls, whisper numbers, and earnings announcements, they can be hyper focused on a very specific data point. And even if they miss marginally on that data point, whether it be ad sales, whether it be user growth, etc., that stock can be punished. But ultimately a lot of these companies do take a longer-term vision and commitment and belief that they're going to be able to derive future earnings from whatever these projects that they decide to invest in. Over time, we've seen these companies have the ability to be very nimble. Their businesses look very different today than they did 20 years ago, 10 years ago, five years ago, even three years ago in many cases. So there is a little bit of a dichotomy there. But broadly, when you're looking at Nasdaq 100, the thesis here is that future growth potential that exists.
Ric: And so that's really very simply the question that investors have to ask themselves. You need to decide, are you interested in what's going on right now or are you interested in making investments for the future where the payoff will come in the years to come? If you are focused on the future, that means you need to be investing in companies that are investing in their futures with the R&D that Ryan just described. And if you are focusing on the future on innovation that argues for the QQQ as opposed to the S&P 500. That's it, isn't it, Ryan? That's the decision investors need to ask themselves.
Spending on R&D As A Driver of Future Innovation
Ryan: That really is it. To put it a different way, you look at sort of the next level of innovation. We look at R&D spend, but we take it a step further and look at patent filings across a number of different disruptive technologies. And what we found is Nasdaq 100 companies have very significant patent exposure. You know, to give an example, May 31st of 2021 through May 31 of this year, NASDAQ 100 companies filed over one quarter of all patents that relate to themes like big data or cybersecurity or wearable technologies or 3D graphics. When you look at some of those themes, they're here, right? Companies are already taking some of those themes. They're in our daily lives and it's contributing to the bottom line. But as you start to look out, there's also significant patent activity and things like the blockchain, like digital currency, like 3D printing, like autonomous vehicles, like biofuels. So, things that may not be a part of our daily lives today, but there is a path where this could become a very significant part of our daily lives. So, there's a nice balance between activity and themes that are already contributing to the bottom line today. That path towards to some of these themes will drive the next leg of earnings growth within these companies.
Ric: So we know what the world has been like in this year, 2022. The stock market has fallen dramatically into a bear market. And then from mid-June to about now, the stock market has been recovering very nicely. So we've seen incredible levels of volatility and there's still a lot of nervousness and uncertainty about what's going on in the world. So talk about what you see as the outlook. What's your statement or sentiment for investors about what they should be thinking and feeling about making investments decisions today? Is this a buying opportunity because prices are low, or should people sit on the sidelines because there's more volatility to come?
Ryan McCormack: Sure. Obviously, it's going to be different from investor to investor. Is this money going to be used for the short-term or is this your retirement? I think for the short-term, I would anticipate volatility to continue. So, for those medium to longer-term investors, this can serve as an opportunity to dollar cost average.
Ric: That's Ryan McCormack. He is The Factor and Core equity Strategist for Invesco QQQ. Ryan, it's always great to have you on the show. Thanks for joining us.
Ryan: Thanks very much, Ric.
Ric Edelman: Ryan and I actually spoke for much longer than you just heard here. You can listen, watch, or read the entire conversation. Just go to TheTruthAYF.com.