Invesco QQQ monthly review

Key highlights from December:

• For the month of December, QQQ’s NAV returned -9.01%, underperforming the S&P 500 Index which also returned -5.76%. The Russell 1000 Growth Index outperformed QQQ which returned -7.66% along with the Russell 1000 Value Index which returned -4.03%.
• QQQ’s underperformance versus the S&P 500 was largely driven by its overweight exposure and differentiated holdings in the Consumer Discretionary sector. QQQ’s Information Technology overweight exposure and differentiated holdings also detracted from relative performance.
• QQQ saw outflow of $1.65 billion.
• QQQ ended the month with $145.40 billion in Assets Under Management (AUM) and remained the 5th largest ETF in the US (based on AUM).
• For the month of November, shares traded of QQQ fell by 11.60% month-over-month along with notional value traded falling by 11.89% month-over-month.¹

Market Recap

For the month of December, QQQ’s NAV returned -9.01%, underperforming the S&P 500 Index which also returned -5.76%. The Russell 1000 Growth Index outperformed QQQ which returned -7.66% along with the Russell 1000 Value Index which returned -4.03%.

After the massive move up on the last day of trading seen in November, the market continued the overall trend seen this year and moved lower during the month of December. Both the S&P 500 and QQQ finished the year at levels seen in the beginning of November with QQQ near its 52-week low. The release of the November Consumer Price Index (CPI) reading and the December Federal Open Market Committee (FOMC) meeting, the last meeting of 2022, proved to be major news events for the market, as we saw trading volume drop the second half of the month.²³ With that being said, there were notable data releases that gave insight in the current economic environment.

The November CPI reading, which is a measure of inflation in the US, was released on December 12^th and came in below analysts’ expectations. The month-over-month reading was reported at 0.1% vs. the 0.3% expectation, while the year-over-year came in at 7.1% vs. 7.3% reading. This was a significant change from the prior month year-over-year reading of 7.7%. Energy and commodities saw decreases compared to the prior month, the change in food was the same while the cost of services ex-energy continued to climb. Markets rose on December 12^th with the hopes that the lower inflation reading would lead to a dovish stance from the FOMC.

The FOMC held their final meeting of 2022 on December 12^th and 13^th and raised the target rate by 0.50%, placing the upper bound at 4.5%. The 50-basis point move was expected by the market prior to the meeting.⁴ However, investors looked to Federal Reserve (Fed) Chairman Jerome Powell for guidance around future rate hikes. During his post-meeting press conference, Powell remained firm that the fight against inflation is far from over and that rates will likely remain higher for longer. He reiterated the need for rates to remain restrictive to prevent inflation from becoming entrenched. Results from the meeting indicated that the terminal rate, or the level where the FOMC would stop rate hikes, may rise to 5.1%. This level indicated that there may be as many as three more 0.25% rate hikes in 2023.

Moreover, the FOMC also indicated that rate cuts may not arrive until 2024. Similar to previous meetings, Powell stated the committee will remain data dependent and that future data points will dictate how the adjust monetary policy going forward.

Other data releases worth noting in December were Q3 Gross Domestic Product (GDP) and US Pending Home Sales. The annualized quarter-over-quarter US Q3 GDP reading was released during the month and was reported at 3.2%, coming in above the 2.9% analysts’ expectation. This reading broke the trend from the previous two quarters which were both negative. Year-over-year pending home sales dropped over 38%, a continuation of the trend seen all year. This year-over-year slowdown is now worse than what was seen during COVID Pandemic and the Global Financial Crisis in 2008.

China rolled back many of the “zero-COVID” policies that had been in place since the beginning of the outbreak of COVID-19. Individuals can now quarantine in their home vs. state sponsored facilities if they have mild or no symptoms. They are also able to travel more freely inside of the country. The sudden change in policy caused many countries to question whether individuals traveling from China should be required to provide a negative test in order to gain entry into their country.

QQQ Performance

From a sector perspective, Energy, Utilities and Health Care were the best performing sectors in QQQ and returned 3.54%, -1.33% and -3.85%, respectively. These three sectors had average weights during December of 0.20%, 1.47% and 7.50%, respectively. The bottom performing sectors in QQQ were Consumer Discretionary, Information Technology and Communication Services, with average weights of 14.05%, 50.27% and 15.52%, respectively. Consumer Discretionary returned -16.51%, Information Technology returned 8.87% while Communication Services returned -7.65%.

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.

QQQ’s underperformance vs. the S&P 500 was largely driven by its overweight exposure and differentiated holdings in the Consumer Discretionary sector. QQQ’s Information Technology overweight exposure and differentiated holdings also detracted from relative performance. Underweight exposure and differentiated holdings in Health Care and Consumer Staples also detracted from relative performance. Lack of exposure to the Materials, Real Estate and Financials positively contributed to relative performance vs. the S&P 500.

With QQQ’s annual reconstitution occurring on the third Friday of December, the fund gained exposure to the Energy sector by adding Baker Hughes and Diamondback Energy. Although the Energy sector had negative performance within the S&P 500, these two companies both had positive performance for the month and returned 4.49% and 2.40%, respectively. This caused Energy to be the only sector in QQQ with positive absolute performance for December.

QQQ’s overweight exposure to Tesla, Apple and Amazon.com were the largest detractors to relative performance vs. the S&P 500. Tesla, Apple and Amazon.com had average weights during the month of 2.94%, 12.44% and 5.54%, respectively.

Overweight exposure Meta Platforms, Broadcom and Pepsico contributed the most to relative performance vs. the S&P 500 and had average weights of 2.32%, 2.05% and 2.32%, respectively.

The best performing stocks within QQQ for the month, on an absolute basis, were Docusign (+15.19%), Align Technology (+7.24%) and Splunk (+6.59%) The worst performers for December were Tesla (-36.73%), Lucid Group (-32.64%) and Marvell Technology (-20.38%). Please note that Docusign and Splunk are no longer held in QQQ due to the annual reconstitution that occurred on December 16^th.

Tesla’s stock continued to face headwinds during the month of December as the electric vehicle manufacturer saw its market capitalization drop from $615 billion at the end of November to $389 billion. The company has faced many supply chain issues throughout the year while the stock has not been helped by ongoing sales from Elon Musk. Musk’s purchase of the social media platform Twitter has been a concern of investors for the majority of the year. Investors have worried about how much stock Musk would sell in order to finance the purchase that came in around $44 billion, along with how much of Musk’s time would be absorbed by the operations of Twitter. Reports that Tesla would be slowing operations in its Shanghai factory weighed on the stock price during the middle of the month while concerns that the company would not meet its Q4 delivery target caused the stock to also fall at the end of the month.

From a technical perspective, QQQ closed the year at $266 per share, $6 above the lowest closing price over the previous year. This price level of $266 is below its 20-, 50-, 100- and 200-day moving averages.  While the ETF had opportunities to break above resistance levels during the month, macroeconomic conditions were the primary catalysts that prevented QQQ from breaking out above resistance. $260 per share has acted as support during the pullback in November and during the last week of trading in December. Conversely, QQQ has faced consistent resistance at the 100-day moving average, having failed to trade above it three times in the last two months. Investors will watch these levels closely as trading continues in the New Year.

Trading Stats

For the month of December, shares traded of QQQ fell by 11.60% month-over-month along with notional value traded falling by 11.89% month-over-month. The month saw an average of 50.34 million shares trade each day (vs. 56.94 million last month) for a value of $13.98 billion (vs. $15.86 billion last month). That compares to averages of 67.58 million shares and $5.46 billion over the life of the fund, and 68. 13 million shares and $21.34 billion for past 12 months.