Invesco QQQ monthly review

Overview

• For the month of October, QQQ’s NAV returned -2.05%, outperforming the S&P 500 Index which returned -2.10%. The Russell 1000 Growth Index outperformed QQQ which returned -1.42% while the Russell 1000 Value Index underperformed which returned -3.53%.
• QQQ’s outperformance vs. the S&P 500 was driven by its underweight exposure in the Energy sector. The ETF’s overweight exposure to the Technology sector along with its lack of exposure to Financials also contributed to relative performance vs. the S&P 500.
• QQQ saw inflow of $3.73 billion.
• QQQ ended the month with $194.62 billion in assets under management (AUM) and remained the 5th largest ETF in the US (based on AUM).
• For the month of October, shares traded of QQQ rose by 18.94% month-over-month along with notional value traded rising by 15.97% month-over-month.¹

Market Recap

After a rally in equities failed to move major indices above recent highs, equities finished the month of October in the red. This marked the third consecutive month of declines for equities. The -2.10% monthly move for the S&P 500 Index did not fully illustrate the volatility that was experienced by investors. The VIX Index, which is a gauge of volatility, rose above 20 for the first time since May.² October saw QQQ’s NAV rise 3.60% then fall to -4.10%, before settling down 2.05%.

Rising interest rates continued to be a primary driver of the markets as investors saw the 10-year US Treasury rise to levels not seen since 2007. Yield on the 10-year rose above 5% on an intraday basis before closing at 4.93%. The market saw investors increase selling activity in the 10-year Treasury which caused the price to fall and, in turn, caused yield to rise. Correlation between the 10-year Treasury’s yield and the S&P 500 has historically been positive (0.25 monthly average since 2012). This means that as yields rise, performance of the S&P 500 has been positive. This relationship turned negative in recent months and has caused the S&P 500 to fall as yield has risen (-0.23 for the month of October). With interest rates the highest they have been in over fifteen years, rising from historical lows, the change in correlation may have shown that investors are uncertain the effect higher rates will have on companies’ future earnings.

With Federal Open Market Committee (FOMC) not meeting this month, investors focused on economic releases.³ Readings during the month illustrated the “sticky” nature that inflation currently has. The Consumer Price Index (CPI) was reported on the 12th and showed a year-over-year reading of 3.7%, higher than the 3.6% expectation.⁴ The month-over-month reading was reported above the 0.3% expectation at 0.4% and equated to an annualized reading of 4.8%. The month-over-month reading did fall from the previous month’s reading of 0.6%. The largest contributor to the month-over-month number was an increase to the cost of services, followed by energy.

Personal Consumption Expenditures (PCE) was reported towards the end of month and met the year-over-year expectation of 3.7%.⁵ The month-over-month reading was reported above the expected 0.3% and showed inflation of 0.4%, or 4.8% annualized. Similar to CPI, the month-over-month readings remained well above the FOMC’s target of 2.0% and raised concerns that the current tightening cycle from the FOMC may not yet be over.

This year’s third quarter reading of Gross Domestic Product (GDP) was reported during the last week of the month and showed that the US economy grew at an annualized rate of 4.9%. This was higher than the 4.5% estimate that the street was expecting. The reading of 4.9% was a positive sign and showed that the chance of recession may be lower. However, the market reacted negatively to the announcement in a “good news is bad news” fashion. Investors have been looking for slowing growth, a cooling job market and lower inflation as signals to future FOMC rate decisions. The higher-than-expected GDP number contributed to investors to believing that the economy was not slowing at the pace needed to prevent future rate hikes.

The second portion of the FOMC’s dual mandate, employment, continued to show strength as well. The Unemployment rate was reported at 3.8% and was slightly higher than the 3.7% estimate but was unchanged from the previous month. The month-over-month change in Nonfarm Payrolls also showed employment strength and reported that there was 336k job added.⁶ This was well above the 180k expectation. Moreover, US Initial Jobless Claims continued to show lower numbers of people filing for unemployment. All four readings in October came in at or below 210k, with the lowest reading being reported at 198k. While the strength of the jobs market continued to point to a soft landing, investors were concerned these readings may leave room for another rate hike from the FOMC before yearend.

Companies started reporting 3Q2023 earnings during October. Through the end of the month, approximately 54% of the S&P 500’s constituents had reported earnings. Of those that had reported, 80% had either met or beat analysts’ expectations. Companies in the Technology and Telecommunications sectors overall had positive earnings announcements while Utilities and Energy lagged. With that being said, investors paid close attention to future revenue and earnings guidance. The stock of companies that raised guidance performed well while companies that lowered guidance fell.

QQQ Performance

From a sector perspective, Basic Materials, Utilities and Technology were the best performing sectors in QQQ and returned 7.43%, 2.57% and -0.89%, respectively. During the month, these three sectors had average weights of 0.28%, 1.25% and 57.89%, respectively. The bottom performing sectors in QQQ were Energy, Health Care and Real Estate with average weights of 0.68%, 6.99% and 0.27%, respectively. Energy returned -6.86%, Health Care returned -5.94% while Real Estate returned -4.53%.

standardized performance. Fund performance shown at NAV. Performance data quoted represents past performance, which is not a guarantee of future results; current performance may be higher or lower than performance quoted. Investment returns, and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. An investor cannot invest directly in an index. Index returns do not represent Fund returns. Invesco QQQ's total expense ratio is 0.20%

QQQ’s outperformance vs. the S&P 500 was driven by its underweight exposure in the Energy sector. The ETF’s overweight exposure to the Technology sector along with its lack of exposure to Financials also contributed to relative performance vs. the S&P 500. The Consumer Staples sector detracted the most from relative performance and was driven by its underweight exposure and differentiated holdings. Health Care and Telecommunications also detracted from relative performance. The lag in both Health Care and Telecommunications were driven by its differentiated holdings.

QQQ’s overweight exposure to Microsoft, Amazon.com and Netflix were the largest contributors to relative performance vs. the S&P 500. Microsoft, Amazon.com and Netflix had average weights during the month of 9.81%, 5.32% and 1.47%, and returned 7.08%, 4.70% and 9.03%, respectively. Overweight exposure to Tesla, ON Semiconductor and Texas Instruments detracted the most from relative performance vs. the S&P 500 for the month and had average weights of 3.05%, 0.33% and 1.19%, respectively. Tesla, ON Semiconductor and Texas Instruments returned -19.73%, -32.61% and -9.86%, respectively.

As mentioned before, earnings season was in full swing during the month and many of the QQQ heavyweights reported in October. Tesla and Netflix were the first of the heavyweights to report results on the 18th and were followed by Microsoft, Alphabet, Meta Platforms and Amazon.com later in the month. Investors welcomed the results announced by Netflix as the streaming company beat on both the top and bottom line. Revenue came in at $8.45 billion with diluted earnings-per-share showing $3.73.⁷ Netflix added 8.7 million subscribers during the quarter with the lion’s share being added from international markets. In total, Netflix now has over 247 million subscribers worldwide. The company’s stock rose over 16% the following trading session.

Microsoft announced strong results for their previous quarter as revenue came in nearly $2 billion above expectations, $56.51 billion vs. $54.54 billion. Adjusted earnings-per-share also surprised to the upside at $2.99 vs. the average analysts’ estimate of $2.65. After several quarters of showing slowdown, Microsoft’s Intelligent Cloud division, which contains Azure, showed year-over-year growth of 19.36% and brought in $24.26 billion in revenue. Azure specific revenue rose 29% for the quarter and the company guided that they expect this growth to remain consistent going forward, assuming there are no large currency fluctuations. The software company also spoke of growth in artificial intelligence through the Microsoft CoPilot AI add-on along with their partnership with OpenAI.

Shares of Alphabet fell 9.51% the day after announcing earnings despite beating expectations. Diluted earnings-per-share were $1.55 vs. the estimate of $1.45 while revenue was $76.69 billion vs. the estimate of $75.76 billion. Advertising revenue also beat expectations and was reported at $59.65 billion vs. the estimate of $58.90 billion. The disappointment for investors came through the Google Cloud results as revenue missed the $8.57 billion estimate, coming in at $8.41 billion. Revenue in this segment grew only 1.11% from the previous quarter, a drop from 8.66% in Q2. Investors raised their concern around Alphabet’s slowing cloud growth as competition remained fierce in the segment from the likes of Microsoft and Amazon.

Strong third quarter results from Amazon caused the stock to rise over 6% the day following the announcement. Diluted earnings-per-share were reported at $0.94, 50% higher than the $0.60 estimate. Revenue beat expectations by over $3 billion coming in at $143.10 billion. Amazon Web Services revenue grew 12% with the total number falling short of expectations. The company provided Q4 revenue guidance of $160 billion and $167 billion.

Trading Stats

For the month of October, shares traded of QQQ rose by 18.94% month-over-month along with notional value traded rising by 15.97% month-over-month. The month saw an average of 56.68 million shares trade each day (vs. 47.65 million last month) for a value of $20.33 billion (vs. $17.53 billion last month). That compares to averages of 67.11 million shares and $5.89 billion over the life of the fund, and 54.52 million shares and $17.33 billion for past 12 months.