Since the NASDAQ is down around 20% so far in 2022, it might be the time to heed Warren Buffett’s advice to be greedy when others are fearful. Panic selling in tech stocks due to concerns about slowing growth, interest rate hikes, and geopolitical tensions has created a great opportunity for investors who can hold investments for a long time.
Stock market crashes are not new. The markets have seen many crashes before, and each one was followed by new highs in stock prices. As most of the current volatility in markets has been blamed on the Russian war, historical trends also favor buying on dips during the war times. For instance, the S&P 500 crashed to its lowest level during the Gulf War but rebounded strongly afterward. The market reacted the same way during the Six-Day War in 1967 when Middle East countries suspended oil exports to the United States and European countries.
Despite that, it’s still prudent to reduce risk as pressure is likely to persist on small- and mid-cap tech stocks in the months ahead because of higher borrowing costs and the difficulty of matching exceptional revenue growth in the past two years. Therefore, instead of falling into the trap of picking the right stock, I believe investors can limit the risk and capitalize on an attractive profit-making opportunity by buying Invesco Nasdaq 100 ETF (NASDAQ:QQQM). There are several benefits of buying ETFs when compared to stocks such as diversification and low cost. In the case of QQQM, a major advantage is its focus on large-cap tech stocks.
Why Does QQQM Offer Better Risk Reward?
In the first half of 2021, concerns about overheating valuations, especially in non-profitable small- to mid-cap technology stocks, began to fuel the tech stocks’ selloff. The trend intensified in the second half when several governments started ending social distancing policies.
As displayed in the chart above, during the same period, large-cap stocks extended their 2020 bull run and helped the tech-heavy NASDAQ reach an all-time high in December 2021 before falling dramatically in 2022. The top five large-cap tech stocks including Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Alphabet (GOOG) (GOOGL), and Tesla (TSLA) accounted for almost two-thirds of the overall Nasdaq 100 returns. Meanwhile, 25% of companies listed on the Nasdaq index plunged around 50% from their 52-week highs.
The significant performance dispersion between large and mid to small-cap tech stocks continued into 2022. A number of non-profitable tech stocks, including disruptive tech, SPACs, biotech, IPOs, meme stocks, and others, added significantly to their losses in 2022. For instance, SPDR S&P Biotech ETF (XBI) plunged 34% year to date while WisdomTree Cloud Computing ETF (WCLD) and Global X FinTech Thematic ETF (FINX) plunged around 45% in the past six months. These ETFs have performed poorly due to their high concentration in loss-making small- to mid-cap technology companies.
Moreover, the fundamentals for small-cap growth stocks are likely to remain bleak even if the NASDAQ bounces back. The end of COVID restrictions, higher borrowing costs, and rising inflation would put pressure on their financial figures and growth initiatives in the coming days.
On the other hand, companies with large-cap stocks also started tumbling at the beginning of this year amid a broader stock market selloff. However, the sell-off was not as brutal as with mid-to small-cap stocks. Excluding Tesla, Meta Platforms (FB), and NVIDIA, the rest of QQQM’s top 10 holdings are all down only around 10 to 17% year to date.
Furthermore, the top ten components of the NASDAQ 100, which account for 53 percent of the total holdings, have healthy balance sheets that allow them to invest in future opportunities without resorting to external borrowing. Therefore, these companies have a good chance of recovering significantly once the broader route ends. As an example, Meta Platforms has almost 10% of its market cap in cash while Alphabet holds $121 billion on its balance sheet in cash, equivalents, and short-term investments. Overall, recent trends show that large-cap tech stocks offer better risk-reward because they are less volatile during bearish trends and make larger gains in favorable market conditions.
Why I Prefer QQQM Over QQQ
The two most popular ETFs that track the large-cap segment of NASDAQ include Invesco QQQ (QQQ) and Invesco QQQM. They both look the same and also offer the same access. QQQ is the most popular ETF with assets under management of around $170 billion while QQQM has $351 million in assets under management. QQQM is known as mini QQQ.
From an investment perspective, both ETFs have a tremendous difference. Due to higher liquidity, a penny-wide spread, and a higher trading volume, QQQ could be the best option when it comes to short-term and high-frequency trading.
On the other hand, the Q mini looks like a good play for long-term investors due to its low expense ratio of 0.15 when compared to QQQ’s expense ratio of 0.20. Additionally, Q mini trades at almost half the price of QQQ, making QQQM accessible for smaller investors. In addition, QQQMs legal structure allows it to reinvest a dividend along with lending out its stocks and use the revenue to offset its fees. On the flipside, QQQ is structured as a trust which forbids it to reinvest dividends or lend out its stocks.
Risk Factors to Consider
Every investment brings a certain level of risk and there is no exception with QQQM. Fed’s policies along with broader market sentiments could negatively impact its performance in the future. In addition, the ETF’s significant exposure to a few large-cap stocks could potentially have a massive impact on returns if one of them performs poorly. The slow economic growth and higher uncertainty could lead investors to turn away from high-growth stocks toward safe-haven assets.
Since investing is all about buying low and selling high, the market crash brings the best investment opportunities for investors. One such opportunity is currently available in QQQM, which has fallen significantly year to date. QQQM has the potential to rebound sharply once the market recovers, thanks to its concentration on large-cap tech stocks. QQQM’s low expense ratio and dividend factor make it a sound long-term investment