Invesco QQQ monthly review

Key highlights from August:

• For the month of August, QQQ’s NAV returned -5.12%, underperforming the S&P 500 Index which returned -4.08%, Russell 1000 Growth Index  which returned -4.66% and the Russell 1000 Value Index which returned -2.98%.
• QQQ’s underperformance versus the S&P 500 was largely driven by its overweight exposure in the Information Technology sector and lack of exposure to the Energy sector. The fund’s lack of exposure to Financials along with its exposure in the Consumer Staples sector also detracted from relative performance. 
• QQQ saw outflow of $267.04 million.
• QQQ ended the month with $164.64 billion in AUM and remained the 5^th largest ETF in the US (based on AUM).
• For the month of August, shares traded of QQQ fell -22.29% month-over-month while notional value traded fell -15.98% month-over-month. 

Market Recap

For the month of August, QQQ’s NAV returned -5.12%, underperforming the S&P 500 Index which returned -4.08%, the Russell 1000 Growth Index  which returned -4.66% and the Russell 1000 Value Index which returned -2.98%.

The rally that started on June 16th topped out on August 15th as volatility moved back into the market during the second half of the month. During the two-month long rally, QQQ was up 22.91% and outperformed the S&P 500 which was up 17.46%. Concerns around persistent inflation, signs of economic slowdown and, ultimately, how the Federal Open Market Committee (FOMC) will react were the primary catalysts for this recent selloff.

Although there was not an official meeting for the FOMC in August, the annual Jackson Hole Economic Policy Symposium took place and gave many Fed officials, including Chairman Jerome Powell, the opportunity to offer insight into the Fed’s current mindset. Leading up to Powell’s speech which was the focus of investors, several hawkish comments were provided by other Fed officials. Getting inflation closer to the long-term target of 2% appeared to be the primary messaging. St. Louis Fed President, Jim Bullard who has been one of the more hawkish officials, was quoted in saying that the current rate of 2.25% - 2.50% is not high enough to place downward pressure on inflation. Bullard’s target Fed Fund’s rate is 3.75% - 4.00%, 1.50% higher than the current rate. Others mentioned that depending on the data being reported prior to the September FOMC meeting another 75-basis-point rate hike may be appropriate at the next meeting. (One basis point is equal to 1/100th of 1% and is used to denote the percentage change in a financial instrument.)

Powell delivered a short 8-minute speech in Jackson Hole although it did have a large impact on equity markets. Lower and stable inflation appeared to be the primary focus for the Fed going forward. The Chairman did not provide insight into how large the rate hike at the September FOMC meeting will be, but did state the size will be contingent on the “totality” of the data. It was also stated that taming inflation will require restrictive policy, or higher interest rates, for some time. Powell commented, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.”  

Another aspect from the speech that provided insight into Powell’s mindset was the idea of inflation becoming entrenched. Powell referenced the high inflation in the 1970s, stating that the anticipation of higher inflation became entrenched in the economic decisions of individuals and businesses the longer it persisted. Powell believes that this a possibility now, and the longer inflation remains elevated, the greater the chance that expectations of higher inflation will continue. The fear of inflation becoming entrenched is that it may lead to continued price and wage increases along with slower growth. Lastly, Powell emphasized the need to stay committed to bringing inflation down until “the job is done.” He again referenced the inflation pressure during the 1970s and that the disinflation that occurred in the 1980s only came after multiple failed attempts over the previous 15 years. Powell closed his remarks stating, “We will keep at it until we are confident the job is done.”

Following the speech, equity markets sold off with the S&P 500 falling 3.37% that day, August 26th. Interest rates rose with the yield on the 10-year Treasury finishing the month over 3.1%, the first time since June. The market’s expectation for a cut to the target rate in early 2023, which had contributed to the recent rally, was pushed back to mid-2023. Moreover, Bloomberg estimated the possibility for a 75-basis-point rate hike during the September FOMC meeting to be 70.9%, up from 32% at the beginning of the month.

Performance

For the month of August, QQQ’s NAV returned -5.12%, underperforming the S&P 500 Index which returned -4.08%, Russell 1000 Growth Index  which returned -4.66% and the Russell 1000 Value Index which returned -2.98%. Information Technology, Health Care and Consumer Discretionary were the worst performing sectors in QQQ and returned -6.26%, -5.39% and -4.80%, respectively. These three sectors had average weights during August of 50.53%, 5.94% and 16.41%, respectively. The Utilities sector was the only sector in QQQ that had positive performance for the month and returned 2.99% with an average weight of 1.35%

QQQ’s underperformance versus the S&P 500 was largely driven by its overweight exposure in the Information Technology sector and lack of exposure to the Energy sector. The fund’s lack of exposure to Financials along with its exposure in the Consumer Staples sector also detracted from relative performance. Although performance was negative, QQQ’s underweight to the Health Care sector positively contributed to relative performance vs. the S&P 500.

QQQ’s overweight exposure to Nvidia, Microsoft and Tesla were the largest detractors to relative performance versus the S&P 500. Nvidia, Microsoft and Tesla had average weights during August of 3.13%, 10.48% and 4.58%, respectively. Overweight exposure to Meta Platforms, Pinduoduo, and Paypal Holdings contributed the most to relative performance vs. the S&P 500 and had average weights of 2.88%, 0.19% and 0.91%, respectively.

The best performing stocks within QQQ for the month were Pinduoduo (+45.48%), Constellation Energy (+23.65%) and Atlassian Corp (+18.32%) The worst performers for August were Match Group (-22.89%), Zoom Video Communications (-22.59%) and Moderna Inc. (-19.39%).

Nvidia was the last of QQQ’s heavyweights to report earnings on August 24^th. The semi-conductor company did report lower than expected revenue and earnings-per-share (EPS) results which came in at $6.7 billion for revenue and $0.51 for adjusted EPS. A few weeks prior to the announcement, Nvidia had provided guidance that they were anticipating missing earnings expectations. The company saw a slowdown in their gaming segment over the previous quarter which led management to lower guidance for that segment in the upcoming quarter. Guidance on overall revenue for the next quarter was also lowered to $5.9 billion.

An agreement between China and U.S. regulators to allow auditing of U.S. listed Chinese companies was signed and led to strong performance from companies like Pinduoduo for the month. This development arrives after years of uncertainty around whether such audits would be allowed by the Chinese government. The U.S. government stated that such audits would be required in order for these companies to remain listed. While there are still headwinds that face U.S. listed Chinese companies, this would indicate a move in the right direction.

QQQ traded as high as $334 per share during the month of August. From a technical perspective, the headwinds that faced the overall market proved to be too much for QQQ to sustain the rally that started on June 16^th. Volume had been decreasing as the rally moved into the middle August, a bearish signal showing that not as many investors were participating. As QQQ pulled back during the second half of the month, it moved below several levels of support such as the 20-day, 50-day and 100-day moving averages. QQQ closed the month at $299 per share, just under the $300 per share level which has served as both support and resistance in the past. QQQ also saw its 200-day moving average turn positive for the first time since January of this year. With the trading that has been observed over the previous months, below $300 per share, $294 per share has shown to be a price level that has been both support and resistance.  

Standardized Performance. Performance data quoted represents past performance, which is not a guarantee of future results. An investor cannot invest directly in an index. Index returns do not represent Fund returns.

Trading Stats

For the month of August, shares traded of QQQ fell by 22.29% month-over-month while notional value traded fell by 15.98% month-over-month. The month saw an average of 46.53 million shares trade each day (down from 59.87 million last month) for a value of $14.82 billion (vs. $ $17.64 billion last month). That compares to averages of 67.70 million shares and $5.30 billion over the life of the fund, and 63.84 million shares and $21.76 billion for past 12 months.