Invesco QQQ monthly review

Overview

•  For the month of March, QQQ’s NAV returned 1.21% underperforming the S&P 500 Index which returned 3.22%. The Russell 1000 Growth Index outperformed QQQ which returned 1.76% along with Russell 1000 Value Index which returned 5.00%.
• QQQ’s underperformance vs. the S&P 500 was driven by its overweight exposure and differentiated holdings in the Technology sector. The ETF’s overweight exposure and differentiated holdings in the Consumer Discretionary sector also detracted from relative performance.
• QQQ saw inflow of $2.36 billion.
•  QQQ ended the month with $259.87 billion in AUM and remained the 5th largest ETF in the US (based on AUM).
• For the month of March, shares traded of QQQ rose by 4.47% month-over-month along with notional value traded rising by 6.67% month-over-month.¹

Market Recap

Equities finished March in positive territory, being led by Value-oriented stocks, as the Russell 1000 Value Index outperformed both QQQ and the S&P 500. The positive monthly returns contributed to the performance seen for the first quarter of 2024 where QQQ’s NAV returned 8.66%, underperforming the 10.56% return of the S&P 500 Index.

The Federal Open Market Committee’s (FOMC) March meeting was held over the 19^th and 20^th and led to the rate decision that investors were expecting: no change to the current target rate.² The upper end of the target stayed at 5.50% where it has stood since July of last year. Federal Reserve (Fed) Chairman Jerome Powell’s hawkish comments at the previous meeting allowed investors to further digest the idea of “higher rates for longer.” A new Statement of Economic Projections (SEP) was released this meeting and showed changes to the FOMC’s dot pot.^3,4 The dot plot illustrates the future target rate expectations of committee members and it had a slightly more hawkish tilt than the previous plot. While the current year expectations held at potentially three cuts in 2024, 2025 saw a shift up in the median target rate forecast. This may imply that the FOMC might not cut as quickly to ultimately get to what they believe is the neutral target rate, a target rate that is neither restrictive nor accommodative.

However, statements during the post-meeting press conference were interpreted as dovish and led equities to new all-time highs. Powell stated that “the risks are really two-sided here” implying that lowering rates too quickly may lead to higher inflation returning, while keeping rates restrictive for too long may have a negative effect on employment. Although the FOMC has always had a dual mandate of stable inflation and employment, reigning in inflation had become the more important goal over the past few years. This messaging may be a signal of a more balanced approach between the two mandates.

Powell also answered a question on the uptick seen in the most recent inflation readings and stated that “there’s reason to think that there could be seasonal effects there.” The chairman also stated that the path down to the 2% target inflation rate may have bumps along the way. This eased many investors’ fears of rate cuts arriving even later than expected or a larger shift to a rate hike. The last comment that encouraged equities to move higher was Powell stating that he believed financial conditions were tight. Recent readings have showed conditions easing to levels seen at the beginning of 2022. Investors saw the S&P 500 close above $5,200 for the first time ever on the day of the FOMC meeting.

The Consumer Price Index (CPI) monthly reading was released on the 12^th and showed year-over-year inflation higher than analysts’ expectations.⁵ Inflation came in at 3.2%, higher than the 3.1% estimate and 3.1% reading of the previous month. A rise in the cost of Core Services continued to be lion’s share of the reading with the Cost of Food also contributing to the rise. The cost of Energy and Core Goods fell on a year-over-year basis.

Month-over-month CPI was announced in line with the street’s expectation of 0.4%. This reading was the highest month-over-month reading since October of last year. This was also the first reading since April of 2023 where all components, Food, Energy, Core Goods and Core Services, rose. The cost of Core Services and Energy were the largest contributors to the rise in month-over-month inflation.

The FOMC’s preferred measure of inflation, Personal Consumption Expenditures (PCE), was released on Friday the 29^th when the market was closed in observance of the Good Friday holiday.⁶ Year-over-year PCE was announced at 2.5%, in line with expectations, but slightly higher than the previous reading of 2.4%. A rise in the cost of services accounted for the majority of the increase with the cost of Nondurable Goods and the cost to Nonprofits contributing as well. The cost of Durable Goods fell for the month. Month-over-month PCE was in line with expectations at 0.3% and lower than the previous reading of 0.4%. All components increased with the cost of Services contributing the most, followed by Nondurable Goods.

The weekly Initial Jobless Claims readings continued to show a strong labor market.⁷ The four readings during the month ranged from 209k to 217k. Continuing Claims also continued to show labor strength, falling from the first reading of the month of 1.91 million to 1.81 million. Both readings will continue to be monitored by investors, and the FOMC, as the health of US job market moves more into focus and interest rates remain elevated for longer.

QQQ Performance

From a sector perspective, Energy, Real Estate and Utilities were the best performing sectors in QQQ and returned 11.78%, 11.00% and 5.41%, respectively. During the month, these three sectors had average weights of 0.48%, 0.27% and 1.21%, respectively. The bottom performing sectors in QQQ were Consumer Discretionary, Telecommunications and Technology with average weights of 18.13%, 4.44% and 59.73%, respectively. Consumer Discretionary returned -1.75%, Telecommunications returned 1.29% while Technology returned 1.58%.

Standardized performance - Performance quoted is past performance and cannot guarantee of comparable future results; current performance may be higher or lower. Visit invesco.com/performance for the most recent month-end performance. Investment returns and principal value will vary; you may have a gain or loss when you sell shares. Fund performance reflects fee waivers, absent which, performance data quoted would have been lower. Invesco QQQ’s total expense ratio is 0.20%. Index performance does not represent fund performance. Please keep in mind that high, double-digit and/or triple-digit returns are highly unusual and cannot be sustained.

QQQ’s underperformance vs. the S&P 500 was driven by its overweight exposure and differentiated holdings in the Technology sector. The ETF’s overweight exposure and differentiated holdings in the Consumer Discretionary sector also detracted from relative performance. Underweight exposure in the Energy sector was the third detractor to relative performance vs. the S&P 500. The Health Care sector contributed the most to relative performance and was driven by its differentiated holdings and underweight exposure. Underweight exposure and differentiated holdings in the Real Estate sector also contributed to relative performance to the S&P 500.

QQQ’s overweight exposure to Tesla, Adobe and Apple were the largest detractors from relative performance vs. the S&P 500. Tesla, Adobe and Apple. had average weights during the month of 2.43%, 1.79% and 7.63%, and returned -12.92%, -9.94% and -5.13%, respectively. Overweight exposure to Micron Technology, Nvidia and Alphabet contributed the most to relative performance vs. the S&P 500 for the month and had average weights of 0.82%, 6.27% and 4.71% (combined weight of Class A and Class C shares), respectively. Micron Technology, Nvidia and Alphabet returned 30.23%, 14.22% and 8.93%, respectively.

A favorable quarterly earnings announcement was the primary driver of Micron Technology’s strong performance during the month of March. Analysts were expecting a $0.24 loss but the semiconductor company surprised investors with a positive $0.42 adjusted earnings-per-share.⁸ This was the first time Micron reported positive earnings-per-share since the fourth quarter of 2022. Revenue also surprised to the upside and came in at $5.82 billion vs. the $5.35 billion expectation. Micron saw revenue from all its major business units outperform the estimates that analysts had in place. The company also raised guidance for next fiscal quarter’s revenue to $6.6 billion, 10% higher than the $6.02 billion analyst expectation. Micron has become one of the largest memory chip manufacturers and storage solutions providers in the world. Their products are used in several technologies such as artificial intelligence (AI), 5G, autonomous vehicles and data centers. The company stated on their earnings call that they believe Micron will be one of the biggest beneficiaries in the semiconductor industry as the AI-enabled opportunity continues over the coming years. Micron’s stock rose over 14% the following trading session.

Zscaler started the month on the wrong foot after many investors were disappointed by the quarterly earnings call that occurred after the close on the last business day of February. Although the infrastructure software company beat on both revenue and adjusted earnings-per-share, the company’s stock fell nearly 10% on the first day of trading in March. Revenue was announced at $525 million vs. the expectation of $509 million while adjusted earnings-per-share came in at $0.76 vs. $0.58. Year-over-year earnings growth stood at 105% with revenue growth at 35%. Despite the strong results, many investors were let down by the next quarter’s guidance that was issued. Although the company did increase revenue and earnings guidance for the next quarter, the increase was not enough to satisfy many investors as concerns may be raised around future billings. Overall, the company was happy with the results and positive on the future prospects of the cybersecurity industry.

Adobe was another company that illustrated the focus that investors have on guidance issued for future quarterly results. The company’s revenue results came in at $5.18 billion, above the $5.14 billion estimate. Adjusted earnings-per-share also were announced above expectations, $4.48 vs. $.4.38. The design software company did lower revenue guidance for the upcoming quarter to $5.30 billion, slightly down from $5.31 billion. Although the revision to the next quarter’s revenue was small, many investors sold the company’s stock immediately following the announcement and the next trading session. Adobe’s stock fell by over 13.5% by the end of the following day. Adobe has been viewed to be positioned well as more companies and consumers use generative AI. Firefly became available for use by consumers and currently focuses on creating images from text. It also can alter images by text prompts as well. With a large current subscriber base of their current software, Adobe feels they are positioned well to monetize these capabilities in the generative AI space.

Trading Stats

For the month of March, shares traded of QQQ rose by 4.47% month-over-month along with notional value traded rising by 6.67% month-over-month. The month saw an average of 45.25 million shares trade each day (vs. 43.32 million last month) for a value of $19.95 billion (vs. $18.71 billion last month). That compares to averages of 66.75 million shares and $6.10 billion over the life of the fund, and 49.16 million shares and $18.49 billion for past 12 months.