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May 7, 2020

Big-Tech ETF is poised to top US$100B for first time ever

Greg Newman discusses QQQ and ZQQ

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The torrid surge in technology companies pushed one of the world’s biggest ETFs toward a record value of more than US$100 billion.

Invesco QQQ Trust Series 1, which tracks the Nasdaq-100 Index, is poised to hit that closing milestone for the first time since it began trading in 1999. It’s already hit that level in regular market hours. The ETF extended a rally from its March low to over 30 per cent on Thursday as a broader tech-heavy gauge erased its year-to-date drop amid gains in giants such as Apple Inc., Microsoft Corp. and Facebook Inc.

Investors are picking technology as a safe corner at a time when the coronavirus pandemic is causing so many uncertainties for global markets. Tech behemoths, known for their strong balance sheets and high growth, have counterbalanced the gloom and doom affecting many other industries. With millions of people around the world stuck in their home offices to help contain the outbreak, companies that specialize in remote-working products are becoming a hot spot.

“It’s a sector now that’s just resilient,” said Shawn Cruz, senior manager of trader strategy at TD Ameritrade. “The conditions we’re in right now, companies need to keep operating -- they just need to do it remotely. And that benefits a lot of these tech companies.”

While the Nasdaq Composite Index turned green for 2020 on Thursday, broader gauges such as the S&P 500 Index and Dow Jones Industrial Average remained lower for the year by at least 10 per cent. All three major benchmarks have surged from their March lows, but technology is the only S&P 500 group that’s up for 2020.

That preference for tech is visible in the ETF world. After posting its best month of inflows since 2001 in March, QQQ added another US$3.2 billion in April and US$367 million so far in May. The fund rose 1.6 per cent at 2:17 p.m. in New York -- on track for its highest close since Feb. 21.

“Investors may recognize that the constituents of QQQ’s benchmark, the Nasdaq 100, are well positioned to capitalize on the current shift to digital working and learning, potential advancements in biotech and healthcare along with a number of transformative, long-term themes in the marketplace,” said Ryan McCormack, Invesco QQQ strategist.

Only four other ETFs are currently above US$100 billion -- SPDR S&P 500 ETF Trust, or SPY; iShares Core S&P 500 ETF, or IVV; Vanguard Total Stock Market ETF, or VTI; and Vanguard S&P 500 ETF, or VOO.

Despite QQQ’s rally, traders are increasingly looking to bet against the fund. Short interest as a percentage of shares outstanding on QQQ -- a rough indicator of bearish bets on the fund -- climbed to 5.1 per cent on Wednesday, according to data from IHS Markit Ltd. That’s up from about 2.7 per cent on March 23.

“The thing we haven’t seen yet with tech names is how badly advertising is going to be hit,” said Marc Odo, client portfolio manager at Swan Global Investments. “Those companies are going to have to plug the gaps or their earnings are going to take a hit.”

Still, solid first-quarter earnings from Google parent Alphabet Inc., Facebook, Microsoft and Tesla Inc. have contributed to momentum -- at least for now.