QQQ Isn’t Winded After 2023’s Big Gain, Experts Say

Analysts see even more upside as the popular ETF rides the ‘Mag Seven’ to new highs.

If the 47% gain this year by the tech-heavy Invesco QQQ Trust ETF (QQQ) has you nervous about lofty valuations in the technology sector, you should probably avoid reviewing the ETF’s longer-term performance. 

Spoiler alert: Since 2008, QQQ has racked up a 1,200% total return, which more than doubles the 500% total return by the S&P 500 over the same period. 

Even while describing the exchange-traded fund's performance as “defying logic and the odds,” Bloomberg Intelligence ETF analyst Eric Balchunas can see the rationale behind the QQQ craze. 

“It’s a special index that is not quite like normal market beta,” he said of the $212 billion index-tracking ETF that has taken in nearly $8 billion this year. 

QQQ Carried by Magnificent 7

Citing the renowned “Magnificent Seven” companies that have become dominant performers in the index, Balchunas said, beyond the fundamentals, they lead in such intangibles as brand value, intellectual property and human capital. 

“Something like brand is tough to measure,” he said. “That stuff is not in the numbers.” 

Further, Balchunas explained, the seven companies that have been breakout leaders represent much more than typical companies. 

“Each one of the Magnificent Seven companies is really like many companies in one,” he said. “For example, Google owns YouTube, and that could be its own stocks; those super seven companies are really like a total of 50 companies.” 

While QQQ tracks a modified market-cap weighted index of 100 Nasdaq-listed stocks, it is largely being carried by the tidy list of tech stocks at the top, including Meta Platforms Inc., (META), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOGL), Microsoft Corp. (MSFT), Nvidia Corp. (NVDA) and Tesla Inc. (TSLA). 

For a sense of how those seven companies have been driving returns, so far this year, the worst performer in the group is Apple, up 47%, while the best performer, Nvidia is up 227%. 

Even with those kinds of outsized returns, market watchers aren’t ready to back away anytime soon. 

“The valuations are high, but we’re looking at the underlying holdings and have ‘buy’ or ‘strong buy’ ratings on all the top holdings,” said Aniket Ullal, head of ETF data and analytics at CFRA. 

Ullal said QQQ “uniquely captures many innovative companies in a single index,” which is why CFRA also has a five-star rating on the ETF. 

QQQ Holdings Go Beyond Broader Tech Sector

A nuance of QQQ and the index it tracks is the distinctive carve out from the broader technology sector that became the communications-services sector about five years ago. 

The rationale behind that change, according to Ullal, was that the traditional technology sector was getting so big it was dominating the broader market indexes.  

As a result, a traditional tech sector fund like the Technology Select Sector SPDR Fund (XLK) doesn’t include exposure to companies that are now labeled communication services. 

“QQQ is a very unique animal because it captures all these big companies that are getting split up across the various tech sectors,” Ullal said. 

Tom Graff, chief investment officer at Facet, said that he doesn’t own QQQ but that he can appreciate the appeal, even at current valuation levels. 

“Tech and telecom earnings are up 27% over the same quarter last year and the fundamentals are pretty good,” he said. “I definitely think there’s a nascent investment boom going on in tech, and especially in artificial intelligence.”  

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter