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Defending value stocks now isn’t as easy as it was earlier this year, when the Fed was worried about finally abandoning accommodative monetary policy.
value cohort (broadly defined) has It’s been a strong move since the beginning of the year, which could indicate a nearing peak. But what if high-priced stocks continue to fall next year? There are good reasons to look for a simple stock portfolio with good valuations and solid quality.
In many cases, this means narrowing sector exposure by removing overkill. In theory, this is a simple trick to improve a portfolio’s earnings yield while perhaps reducing its growth characteristics somewhat, but often without compromising on quality.
So what if, say, the Invesco QQQ ETF (QQQ) excludes the tech industry entirely? An experiment worth doing.
This is exactly what the First Trust NASDAQ-100 Ex-Technology Sector Index Fund (NASDAQ: QQXT) To do. Was this effort successful? Is it worth investing in ETFs at this point? Let’s discuss this.
What QQXT has achieved: slightly cheaper portfolio and slightly weaker growth, but equal quality
QQXT tracks the Nasdaq-100 Ex-Tech Sector Index with equal weighting. It is essentially the same as the Nasdaq-100, but excludes only the technology industry (defined according to industry classification benchmarks) component.
QQXT (almost) techless should be rated higher than QQQ. That’s because most tech company names flaunt premium multiples (because of solid profit margins, growth premiums, or big expectations), a problem that’s amplified by market capitalization weighting. And it actually offers a relatively good rating profile.
Let’s tackle the size factor first. His three major investments in QQXT are Biogen (BIIB), Gilead Sciences (GILD) and Lost Stores (ROST). Together, they own approximately 6.3% of net worth. GILD is the only trio with a mega cap.
Who are QQQ’s top trios? Apple (AAPL), Microsoft (MSFT), Amazon (AMZN). The net worth share is ~28.7%.
Therefore, the weighted average EV/Sales of QQXT is about 5.9 times higher than that of QQQ, as the weighted average market capitalization of a portfolio of 60 holdings is approximately $89.3 billion, while QQQ is over $708 billion. is slightly lower than 5.5 times. Estimate. It is not surprising that WA forward revenue growth is also lower, around 13.5% compared to QQQ’s 14.2%.
Second, as my analysis reveals, stocks with a B-Seeking Alpha Quant Valuation grade or better have 7.1% share in QQXT and just 4.9% in QQQ. The relatively high ones (below D+) account for about 80% of QQQ and 78% of QQXT. While not a dramatic difference, it still points to the fact that the latter is slightly better priced.
But was your exposure to quality factors affected? Very little, but yes. As a backing, QQQ has allocated 98.9% of its net worth to stocks with a B- Profitability Rating or better, a figure only slightly higher than QQXT’s 95.6%.
Comparing QQXT and IGM: Hidden Tech Exposure Revealed
Is QQXT really a former tech fund? There are nuances.
By “hidden exposure” we do not mean Pinduoduo (PDD), a technology company in the ICB system and a consumer discretionary player according to the Global Industry Classification Standards. For some reason it permeates QQXT’s stock composition, which is a bit strange, but it’s weight at the moment.
What I’m trying to say is that 1) GICS’ information technology companies will still be found, and 2) QQXT’s simple strategy is that “augmented technology” players (e.g. technically consumer discretion) The fact that it didn’t prevent you from qualifying for that portfolio.
To illustrate it, I made the following chart.
Created by the authors using data from QQXT, QQQ
As you can see, like QQQ, QQXT has no exposure to finance, real estate, energy, and materials (not to be confused with ICB’s basic materials industry). It puts a significant burden on consumer discretion and healthcare. We also still have an allocation to IT, at about 7.9%.
Below is a list of GICS IT companies included in the equity basket.
| stock | Weight in QQXT |
| Fiserv (FISV) | 1.5% |
| PayPal (PYPL) | 1.3% |
| Cisco (CSCO) | 1.8% |
| PAYX (PAYX) | 1.6% |
| Automatic Data Processing (ADP) | 1.7% |
Now, let’s compare the portfolios of the iShares Expanded Tech Sector ETF (IGM), a fund that tracks the S&P North American Expanded Technology Sector Index we covered in our January article.
Upon closer inspection, the overlap between QQXT and IGM is about 15.8%. The following table contains strains that can be found in both. That said, any investor who sees QQXT as an entirely beyond-tech alternative to QQQ should reconsider that there are elements under the hood that he probably doesn’t want.
| stock | Weight in QQXT |
| Netflix (NFLX) | 1.8% |
| Cisco | 1.8% |
| automatic data processing | 1.7% |
| Electronic Arts (EA) | 1.7% |
| eBay (Ebay) | 1.6% |
| Peishex | 1.6% |
| Activision Blizzard (ATVI) | 1.5% |
| fiserv | 1.5% |
| PayPal | 1.3% |
| Amazon (AMZN) | 1.2% |
Performance: Years of Sluggish Earnings, and a Stunning 2022
What returns has QQXT been able to deliver in the past?
In the 2010s, technology investment was strongly associated with alpha. This is supported by the table below (months and years that yielded higher returns than the Nasdaq 100 ETF highlighted in green). And the fact that QQXT has exposure to the IT sector did little to support its return. Consistently underperformed QQQ (2012 and 2013 were exceptions).
Created by authors using data from Portfolio Visualizer
Interestingly, QQQ was used not only during the brief coronavirus recession of 2020, when the tailwinds of the pandemic boosted tech names soaring, but also during the global financial crisis. fell below.
However, in 2022, it outperformed QQQ for six months (including four consecutive months from August to November), ending with a negative return of 7.4% versus QQQ’s 25.9%.
As a result, the compound annual growth rate achieved over the period June 2007 to November 2022 is well below QQQ, but more than 1% above IVV, while risk-adjusted returns (Sharp and Sortino’s ratio) is also slightly better.
| portfolio | IVV | QQQ | QQXT |
| initial balance | $10,000 | $10,000 | $10,000 |
| final balance | $36,270 | $70,581 | $42,141 |
| CAGR | 8.67% | 13.44% | 9.72% |
| standard deviation | 16.06% | 18.99% | 17.96% |
| best year | 32.30% | 54.68% | 46.74% |
| worst year | -37.02% | -41.73% | -43.29% |
| maximum.drawdown | -50.78% | -49.74% | -53.14% |
| sharpe ratio | 0.55 | 0.72 | 0.57 |
| Sortino ratio | 0.8 | 1.11 | 0.86 |
| market correlation | 1 | 0.92 | 0.94 |
Conclusion
QQXT is a relatively high-value, similarly high-quality alternative to QQQ without (nearly) tech in smart beta.
This ETF has a compelling idea at its core. With excess technology-related valuation risk removed, a leading portfolio focused on ex-tech is a blend that may appeal to value investors in an era of high interest rates mixed with recession risk. However, the fund is not without its downsides.
First, its valuation is slightly better than QQQ, partly at the expense of growth. Second, it is possible to extract notech portfolios like QQQ, but that requires deeper research. As a result, the problem with this ETF is that it offers an exposure that investors probably don’t want.
In summary, I see little reason to invest in it, especially considering the 60 bps expense ratio and the incidental D+ Expense grade. The simplistic passive strategy seems a bit overpriced, at least for my taste.