R&D: A Long-Term Growth Investment

R&D: A Long-Term Growth Investment

Blog Author

Ryan T. McCormack

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Talking Points

1

One way to measure a company’s dedication to innovation is to look at research and development (R&D) investment.

2

QQQ companies have invested 2x more in R&D than companies in competing indexes.

Investments are made for the long term. Wouldn’t it be nice to know that companies have the same focus on the future? Innovation can be a big driver of growth. It doesn’t happen overnight, though. Rather, it is the result of a disciplined approach to planning, investing and executing strategic plans. Innovation takes time — very often years — and can be expensive.

One way to measure a dedication to innovation is to look at research and development (R&D) investments. For accounting purposes, R&D investment can be a drag on earnings in the year the investment is made, but companies hope that commitment to development will result in higher profitability down the road. Ironically, one way to increase profitability in the current year is to cut R&D investments. However, this likely does not help the firm over the long term. Comparing Invesco QQQ’s underlying index, the Nasdsaq-100, to the S&P 500 and Russell 1000 Growth Indexes shows that companies held in Invesco QQQ offer higher total dollars spent on R&D, as well as a larger percentage of sales reinvested back into the companies via R&D.

R&D: Nasdaq-100 vs. S&P 500 and Russell 1000 Growth Indexes

Russel 1000 Growth R&D Rate Russell 100 Growth R&D S&P 500 R&D Rate S&P 500 R&D Nasdaq-100 R&D Rate Nasdaq-100 R&D Avg-Weighted R&D ($M) 3,000 4,000 5,000 6,000 7,000 2,000 1,000 0 8,000 9,000 10,000 R&D Reinvestment Rate 0 2% 4% 6% 8% 10% 12% 2016 2017 2018 5,956 2,454 2,672 6,987 2,710 3,476 9,226 3,503 4,855 5.5% 6.4% 7.5% 4.3% 4.3% 4.9% 8.9% 9.2% 9.8%
Russel 1000 Growth R&D Rate Russell 100 Growth R&D S&P 500 R&D Rate S&P 500 R&D Nasdaq-100 R&D Rate Nasdaq-100 R&D Avg-Weighted R&D ($M) 3,000 4,000 5,000 6,000 7,000 2,000 1,000 0 8,000 9,000 10,000
R&D Reinvestment Rate 0 2% 4% 6% 8% 10% 12%
2016 2017 2018 5,956 2,454 2,672 6,987 2,710 3,476 9,226 3,503 4,855 5.5% 6.4% 7.5% 4.3% 4.3% 4.9% 8.9% 9.2% 9.8%
Source: Bloomberg L.P., S&P and FactSet Inc., as of March 31, 2019. Performance data quoted represents past performance and does not guarantee future results. An investment cannot be made in an index. Index returns do not represent fund returns.
Important Information Disclosure
The Nasdaq-100 Index comprises the 100 largest non-financial companies traded on the Nasdaq.The Russell 1000® Growth Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of large-cap growth stocks.The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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