Invesco QQQ monthly review

Overview

• For the month of August, QQQ’s NAV returned 1.16% underperforming the S&P 500® Index which returned 2.43%. The Russell 1000 Growth Index outperformed QQQ which returned 2.08% along with the Russell 1000 Value Index which returned 2.68%.
• QQQ’s underperformance vs. the S&P 500 was driven by its overweight exposure and differentiated holdings in the Technology sector. The ETF’s underweight exposure and differentiated holdings in the Health Care sector also detracted from relative performance.
• QQQ saw outflow of $473.40 million.
• QQQ ended the month with $286.69 billion in AUM and remained the 5th largest ETF in the US (based on AUM).
• For the month of August, shares traded of QQQ rose by 13.34% month-over-month along with notional value traded rising by 8.66% month-over-month.¹

Market Recap

August emerged to be one of the more interesting months of 2024 as volatility spiked to 2020 levels early in the month. The spike was short-lived, and volatility finished below the end of month July level. Illustrating these moves was the VIX Index, a commonly used gauge for volatility.² The VIX rose from 16 to a high-water mark of 65, a level not seen since early in the COVID-19 Pandemic. The VIX ultimately finished the month at 15. Concerns around rising U.S. unemployment, the U.S. Dollar’s relationship with the Japanese Yen and future monetary policy were the primary catalysts for equity markets during August.

The most recent U.S. Unemployment reading was released on August 2^nd and showed that unemployment had risen to a rate of 4.3%. This had been the highest reading since October 2021. While the 4.3% was not necessarily high, the rate of increase over the past twelve months triggered a signal in the Sahm Rule which showed that there may be a recession on the horizon. The Sahm Rule is named after economist Claudia Sahm and states that when the three-month average of U.S. unemployment rate rises 0.5% or more above the low reading of the previous twelve months, the economy may be at the beginning of a recession. The August 2023 U.S. Unemployment reading stood at 3.8% so the rise to 4.3% represented a 0.6% rise and triggered the rule. Since 1950, the U.S. economy had seen eleven recessions and the Sahm Rule had correctly signaled ten out of the eleven. Investors saw a drop in equities on August 2^nd due to the reading with the S&P 500 falling 1.84% and QQQ’s NAV down 2.38%.

On July 31^st, the Bank of Japan announced a 0.25% rate hike to the country’s overnight target rate. The increase caused the Japanese Yen to gain value versus the U.S. Dollar (USD). This trend continued through the weekend and caused a large spike in volatility during the evening of Sunday, August 4^th. As Asian markets opened, volatility rose, and U.S. equity futures fell. At the heart of this was the unwind of the Japanese Yen carry trade. This trade had been used by many investors: borrow Yen to buy USD denominated bonds and use the interest to pay back the loan used in Yen. The trade had become more attractive as USD denominated bonds’ yields had risen over the past few years. However, the rate hike done by the Bank of Japan caused the Yen to appreciate in value and squeeze the profits of the carry trade. U.S. Investors woke up Monday, August 5^th to see S&P 500 futures down 4% and the VIX reading above 60, a level last seen in spring of 2020. Equities managed to pare some of the losses during the day on the 5^th with the S&P 500 finishing down 2.99% and QQQ’s NAV down 2.96%.

The volatility created by the Yen carry trade faded the following days and weeks following August 5th. The decrease in volatility led to equities rallying, with the S&P 500 erasing the move down that occurred on August 5th by the end of the same week. Positive data releases contributed to the move back up seen in the 2nd half of the month which included favorable inflation readings.

The Consumer Price Index (CPI) reading was released on August 14th and saw the year-over-year report beneath expectations while the month-over-month was in line.³ Year-over-year inflation was reported at 2.9%, below the estimate and prior reading of 3.0%. Core CPI, which excludes the costs of Food and Energy, rose at a year-over-year rate of 3.2%, in line with estimates and below the prior reading of 3.3%. There was a rise in the cost of Core Services, which continued to be the largest contributor to the year-over-year reading. Increases were also seen in the cost of Food and the cost of Energy. The cost of Core Goods continued to fall for the seventh month in a row and was the only detractor to year-over-year CPI.

Month-over-month CPI was in line with estimates but higher than the prior month’s reading of -0.1%. The number was reported at 0.2%, with a rise in the cost of Core Services being the lion’s share of the increase. There were also slight increases to the costs of Food and Energy while the cost of Core Goods fell.

The annual Jackson Hole Economic Symposium hosted by the Kansas City branch of the Federal Reserve (Fed) was held during the month, with Fed Chairman Jerome Powell’s speech on August 23rd being the highlight.⁴ Powell said that it was time to shift to rate cuts in future meetings stating, “The time has come for policy to adjust.” Similar to prior press conferences, Powell would not go into detail on timing but reiterated that the committee would focus on the incoming data. The Chairman also commented on the labor market stating that it was no longer overheated. Powell attributed the recent rise in unemployment to a growing workforce and companies not hiring as quickly versus a breakdown in the hiring conditions. Ultimately, Powell stated that “a good deal” of progress had been made to stabilizing prices while staying close to full employment.

QQQ Performance

From a sector perspective, Basic Materials, Utilities and Telecommunications were the best performing sectors in QQQ and returned 4.06%, 3.77% and 2.75%, respectively. During the month, these three sectors had average weights of 1.78%, 1.26% and 4.34%, respectively. The bottom performing sectors in QQQ were Energy, Real Estate and Technology which had average weights of 0.48%, 0.21% and 60.07%, respectively. Energy returned -5.61%, Real Estate returned -0.92% while Technology returned 0.63%.

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 underweight exposure and differentiated holdings in the Health Care sector also detracted from relative performance. Lack of exposure to the Financials sector was the third detractor from relative performance vs. the S&P 500. The Energy sector contributed the most to relative performance and was driven by its underweight exposure. Differentiated holdings in the Consumer Discretionary and Basic Materials sectors also contributed to relative performance to the S&P 500.

QQQ’s overweight exposure to Intel, PDD Holdings and Tesla were the largest detractors from relative performance vs. the S&P 500. Intel, PDD Holdings and Tesla had average weights during the month of 0.62%, 0.61% and 2.71%, and returned -27.83%, -25.43% and -7.74%, respectively. Overweight exposure to Meta Platforms, Mercadolibre and Netflix contributed the most to relative performance vs. the S&P 500 for the month and had average weights of 4.80%, 0.67% and 1.96%, respectively. Meta Platforms, Mercadolibre and Netflix returned 9.79%, 23.53% and 11.62%, respectively.

The Nvidia earnings announcement on August 28^th was in focus for many investors. Some investors have used Nvidia earnings as a gauge showing the progress of artificial intelligence (AI). Moreover, Nvidia has grown to be one of the largest companies in the world and boasted a market-capitalization over $3 trillion prior to the earnings announcement. This has caused the chipmaker’s price action to have a large effect on the overall market. Adjusted earnings-per-share (EPS) was reported at $0.68 vs. the consensus analysts’ estimate of $0.64.⁵ Revenue also came in above expectation at $30.04 billion vs. $28.82 billion. Quarter-over-quarter EPS growth has been slowing from 147% one year ago, to 11% this most recent announcement. Nvidia also issued revenue guidance for its next quarter at $32.5 billion. If this is attained, the chipmaker’s quarter-over-quarter revenue growth would slow to 8%. Although the numbers beat estimates, Nvidia’s stock fell in afterhours trading immediately following the announcement and fell by over 6% on August 29^th, the following trading day. The slowdown in growth, although still positive, may have raised concerns for some investors in Nvidia’s stock, which has returned over 140% year-to-date as of the end of August.

Fortinet had the best absolute performance out of all holdings in QQQ during the month of August with a strong earnings announcement being the primary catalyst. Adjusted earnings-per-share came in at $0.57 vs. the estimate of $0.41. Revenue also came in above estimates at $1.43 billion vs. $1.40 billion. After a slowdown of growth in Q4 of 2023, earnings-per-share grew at a strong pace, on a year-over-year basis, at 50%. Service revenue continued to be the growth engine for new revenue with a year-over-year growth rate of 19.8%. Fortinet issued revenue and earnings-per-share guidance for the next quarter as well. The cybersecurity company expected next quarter’s revenue to fall in the range of $1.45 billion to $1.51 billion. Analysts were expecting $1.40 billion. Adjusted earnings-per-share was expected to be in the range of $0.56 to $0.58 vs. the estimate of $0.41.

CrowdStrike announced earnings on the same day as Nvidia, and results came in above expectations. Adjusted earnings-per-share came in at $1.04 vs. the estimate of $0.97 while revenue was announced at $963.87 million vs. $958.18 million. The favorable earnings announced was welcomed by many investors as the company’s stock has tried to recover from a drop in July caused by a computer outage induced by CrowdStrike software. The outage was estimated to affect approximately 8.5 million Microsoft Windows systems around the world. CrowdStrike did lower full fiscal year earnings-per-share and revenue guidance citing lower subscription revenue going forward. CEO George Kurtz did mention that since the outage occurred in the final weeks of the quarter it caused business deals to be delayed in closing but still many remained in the pipeline. CrowdStrike’s stock finished the month of August up 19.5%.

Trading Stats

For the month of August, shares traded of QQQ rose by 13.34% month-over-month along with notional value traded rising by 8.66% month-over-month. The month saw an average of 41.30 million shares trade each day (vs. 36.44 million last month) for a value of $18.99 billion (vs. $17.48 billion last month). That compares to averages of 66.26 million shares and $6.29 billion over the life of the fund, and 43.19 million shares and $18.07 billion for past 12 months.