QQQJ: Increasing Market Breadth Can Kickstart A 2024 Rebound

The Invesco NASDAQ Subsequent Gen 100 ETF (NASDAQ:QQQJ) invests within the a hundred and first to the 2 hundredth largest firms listed on the NASDAQ change. By this measure, we take a look at QQQJ because the junior fund subsequent to the extra high-profile Invesco QQQ Belief (QQQ) with a definite publicity extra in the direction of mid-caps.

A serious theme available in the market this yr has been the outperformance of the mega-cap tech leaders, whereas smaller firms have been extra pressured by the shifting macro backdrop together with high-interest charges. Certainly, in comparison with a 37% return over the previous yr in QQQ, the Subsequent Gen 100 ETF is up simply 1%.

That being stated, we imagine QQQJ is well-positioned to climb increased going ahead. In our view, an setting of easing inflationary pressures and stabilizing rates of interest into 2024 ought to help increasing market breadth, benefiting this essential market section.

What’s the QQQJ ETF?

QQQJ technically tracks the “The Nasdaq Next Generation 100 Index” which contains a modified market capitalization-weighting methodology. On this case, a 4% weighting cap is utilized to the relative market worth of the 100 largest firms exterior of the Nasdaq-100. There may be additionally a quarterly rebalancing.

Notably, QQQJ excludes monetary sector shares in addition to REITs. One rationalization for this index-level resolution considers that these teams are over-represented inside Nasdaq and would in any other case dominate the fund on the expense of shares in non-financial sectors pushed extra by company-specific elements aside from rates of interest and macro traits.

Going via the current portfolio, whereas Nasdaq is commonly synonymous with expertise, the sector represents about 41% of the entire publicity. That is adopted by the Healthcare sector at 22%, and Shopper Cyclical names at 11% of the weighting.

CDW Corp. (CDW) and MongoDB (MDB) every with a 2.3% weighting are the 2 largest present holdings. Remember the fact that the Nasdaq and QQQJ additionally embody worldwide shares, with China’s Baidu (BIDU) with a 1.4% weighting as one instance. On this level, non-US firms comprise roughly 12% of the fund.

QQQJ Efficiency

We talked about that 2023 has been a difficult yr for QQQJ, lagging behind broad market benchmarks, returning simply 3.6% year-to-date. Whereas the portfolio contains some huge winners, there are additionally laggards dragging the efficiency.

Our knowledge reveals that virtually half the shares have a constructive return this yr which is indicative of the underlying volatility and uneven efficiency. MongoDB stands out as the highest gainer with a 106% return so far in 2023, whereas NovoCure Ltd. (NVCR) is the worst performer, dropping -83% this yr.

So to elucidate the efficiency unfold between QQQJ and its huge brother in QQQ, the latter benefited from a extra concentrated portfolio amongst mega-cap leaders resembling Apple (AAPL), Microsoft (MSFT), and NVIDIA (NVDA) that led the general market increased inside QQQ’s uncapped capitalization primarily based weighting methodology.

On the identical time, it is value putting the Subsequent Gen 100 fund’s return within the context of extra comparable ETFs inside its class. On this case, QQQJ’s efficiency in 2023 is roughly in step with the three% acquire from the iShares Russell 2000 ETF (IWM) or the 6% return from the iShares Core S&P MidCap ETF (IJH).

The purpose right here is to say that whereas QQQJ wasn’t a world-beater in 2023, we’re extra desirous about the place it goes subsequent.

What’s Subsequent For QQQJ?

Heading into 2024, there’s a constructing consensus that the Fed is completed climbing charges whereas the pattern of decrease inflation has even opened the door for rate cuts. This setup, even because the financial system stays resilient and averts a recession, describes the allusive “soft landing” which will have appeared inconceivable going again to final yr however is now transferring nearer to a actuality.

The way in which we see it taking part in out is that this favorable macro backdrop ought to be constructive for danger sentiment and set the stage for the subsequent section of the present bull market. So whereas QQQ and SPY have led increased, we imagine the subsequent leg increased shall be outlined by increasing market breadth the place primarily a wider group of shares take part within the rally.

In our view, QQQJ is properly positioned to seize this pattern, with its mixture of cyclical names in addition to rising high-growth tech shares that might deserve some growth of valuation multiples. In different phrases, a rotation available in the market away from the winners of 2023 and extra towards beaten-down names together with -mid and small-caps might be a strong tailwind for QQQJ to realize momentum in 2024.

By way of danger, the bearish case for this section will probably want a deeper deterioration of financial situations. If inflation by some means re-accelerated, this may drive the Fed to probably proceed climbing, probably resulting in a brand new spherical of monetary market volatility. In the end, any improvement that impacts company earnings to the draw back would signify a headwind for shares.

Remaining Ideas

What we like about QQQJ is that the fund presents a singular publicity to shares that aren’t sometimes broadly held or included in broad market indexes. This side provides to its diversification potential that may complement a core holding in a broad market fund like QQQ or SPY, for instance.

In our view, QQQJ is an efficient possibility for buyers so as to add fairness publicity in an essential market section that may ship constructive returns over the long term.