Keeping up with the Nasdaq 100 Index

Key Takeaways

The Nasdaq 100 Index, designed to signify the most important 100 nonfinancial firms listed on the Nasdaq change,¹ has delivered incredibly strong performance since the global financial crisis of 2008–09. When traders take into consideration U.S. Tech or U.S. development they incessantly suppose first about this broadly adopted benchmark.

The Invesco QQQ Trust Series 1 (QQQ) is an funding automobile designed to trace the returns of this index, and it had greater than $257 billion in belongings below administration as of April 3, 2024.²

In 2024, even if the Nasdaq 100 Index is not a fund’s official benchmark, you can expect that investors are going to compare different investment options back to it, given its strong performance and the proliferation of such terms as the Magnificent 7.

Towards the tip of the primary quarter, we observed one thing fascinating:

• Whereas the so-called Magnificent 7 was being talked about on a regular basis in 2023, the primary quarter of 2024 has seen extra dispersion. Nvidia has continued to drive its share worth increased, however different firms like Tesla and Apple have exhibited higher volatility. Even when giant firms are nonetheless doing properly, naively holding all seven of those shares has not been as robust a technique because it was in 2023.

• The WisdomTree U.S. Quality Growth Fund (QGRW) has opened up a major hole over QQQ when it comes to outperformance. This can be a brief interval of roughly three months, however the extra curious factor to us was that in a lot of 2023 the returns of QQQ and QGRW have been very shut to one another. We don’t know if any hole can be maintained, nevertheless it’s necessary to dig into what occurred that was totally different from the prior interval to contribute to this distinction in returns.

• The WisdomTree U.S. Quality Dividend Growth Fund (DGRW) is roughly maintaining with QQQ. Once more, it is a brief interval, and we don’t need to learn an excessive amount of into it, however the necessary element right here is {that a} technique that features solely dividend-paying firms has tended to lag in upward-trending development markets. A few of the largest U.S. firms represented in QQQ don’t pay dividends. If DGRW begins to maintain tempo, we imagine this tells us that we now have seen a shift within the main drivers of U.S. fairness market efficiency relative to 2023, when DGRW’s efficiency considerably lagged that of QQQ.

Figures 1a and 1b enable us to begin seeing the numbers behind this story.

Determine 1a represents the standardized return comparability of QGRW, DGRW and QQQ, with knowledge as of the newest quarter-end, December 31, 2023. That is helpful as a result of we are able to take a look at the one-year determine, which is definitely the calendar 12 months 2023 determine. QGRW and QQQ have been related, in that the NAV return figures have been within the vary of 55%–56%, roughly talking. DGRW, then again, didn’t crack 20%.

Determine 1b represents the year-to-date 2024 NAV return of QGRW, DGRW and QQQ, particularly from January 1, 2024, to March 22, 2024, practically the total first quarter. QGRW’s return is within the area of 13% over this era, whereas QQQ and DGRW are sitting round 9%, roughly talking. That is nonetheless only a brief time period, however we needed to discover “why” with the intention to begin considering by means of how this would possibly or may not proceed throughout the the rest of the 12 months.

Determine 1a: Standardized Efficiency Comparability

For the newest month-end and standardized efficiency and to obtain the respective Fund prospectuses, click on the related ticker: DGRW, QGRW and QQQ.

Determine 1b: Cumulative Efficiency Comparability

For the newest month-end and standardized efficiency and to obtain the respective Fund prospectuses, click on the related ticker: DGRW, QGRW and QQQ.

Attribution: The Story behind the 2024 Return Distinction

As we flipped the calendar from 2023 to 2024, many people anticipated to see a higher dispersion within the efficiency of the most important firms. This has occurred within the first a part of 2024. Beneath, we element the first elements of QGRW versus QQQ and DGRW versus QQQ.³

• QGRW vs. QQQ: The most important constructive contributor was that Nvidia’s common weight in QGRW was 7.53% in comparison with 5.07% in QQQ, and we’re all conversant in the power of Nvidia’s returns over this era. Meta Platforms was one other over-weight allocation that helped QGRW relative to QQQ, and we are able to notice that SuperMicro Laptop was included in QGRW however not in QQQ, albeit at a really small weight. It was fascinating to see that Intel was not included in QGRW and this exclusion of one among Nvidia’s rival chip firms was additionally a constructive contributor. To be honest and acknowledge there are positives and negatives in any interval, the 2 largest detractors for QGRW relative to QQQ have been over-weight positions in Apple and to Tesla.

• DGRW vs. QQQ: On the opposite facet of the coin, the 2 greatest drivers of constructive attribution for DGRW relative to QQQ are the 1) exclusion of Tesla, since it’s not a dividend-paying firm and a couple of) under-weight allocation to Apple, since DGRW’s index is weighted by money dividends and never market capitalization. Intel, although it does pay a dividend, was additionally excluded from DGRW, and this helped relative efficiency. Elly Lilly and Abbvie have been included from DGRW however not QQQ, and this additionally helped DGRW’s relative efficiency. Then again, the three greatest drivers of unfavorable attribution for DGRW relative to QQQ have been 1) an under-weight place in Nvidia, 2) an under-weight place in Meta Platforms, although WisdomTree did run a particular rebalance in March 2024 based mostly on Meta initiating a dividend cost, and three) the exclusion of Amazon.com as a non-dividend-payer.

How Related Is QGRW or DGRW to QQQ?

We all know that there’s a excessive diploma of familiarity with QQQ amongst U.S. traders—not many ETFs have lasted greater than 20 years and generated belongings below administration of greater than $200 billion. Nevertheless, once we notice that this technique is monitoring the return of the Nasdaq 100 Index and take into consideration what that index is designed to do, many who we now have spoken to have been shocked.

The methodology actually is simply to incorporate the 100 largest nonfinancial shares listed on the Nasdaq change. A standard assumption is that it’s a tech index and it’s true that the Magnificent 7 of 2023 have been included inside the prime 10, however that is extra coincidental than intentional.

The Sector Dialogue

Determine 2 reveals the sector exposures of QGRW, DGRW and QQQ.

• QQQ and QGRW have been very related from the standpoint of Telecommunication Providers, Client Discretionary, Vitality, Well being Care, Industrials, Info Know-how, Supplies, Actual Property and Utilities. On this context, “related” may additionally imply that neither technique had any vital publicity. Client Staples was a notable distinction, in that QGRW had practically zero publicity, whereas QQQ had some. Financials was a notable distinction—we bear in mind within the Nasdaq 100 Index methodology is does point out ‘nonfinancial’. So, out of 11 sectors, two had vital variations and 9 have been very related.

• QQQ and DGRW had variations in sector publicity throughout the board. DGRW had virtually zero publicity to Telecommunication Providers and was very under-weight in Info Know-how in comparison with QQQ. DGRW had extra publicity to Client Staples, Well being Care, Financials and Industrials.

Ultimately, it’s clear that these in search of extra similarity to the sector distribution in QQQ might be happier with QGRW, whereas DGRW is a notably totally different technique virtually throughout the board from a sector perspective.

Determine 2: Sector Exposures

Conclusion: Matching Technique with Outlook

It was clear that when 2024 started, most have been anticipating a special type of fairness market efficiency thank in 2023. As a reminder—2023 was the 12 months of the Magnificent 7, the place the most important firms led the best way. The Nasdaq 100 Index, tracked by QQQ, captured this fantastically.

If 2024 is a 12 months of higher dispersion and it’s not so simple as the most important firms delivering the strongest returns, then specializing in “higher” firms—outlined as having higher basic metrics—may present one thing helpful and result in no less than attainable efficiency differentiation. If fairness market volatility have been to tick up, the dividend orientation of DGRW might be significantly notable. In our opinion, even when we have no idea the long run with certainty, we are able to emphasize the significance of getting evolving market outlooks match up with funding methods that seize these concepts.

Determine 3: Vital Traits of Funds on this Comparability

In case you are inquisitive about diving extra into the comparability of those Funds, please take a look at our Fund Comparison Tool.

¹ Supply: Nasdaq 100 Index, Nasdaq. https://indexes.nasdaq.com/docs/Methodology_NDX.pdf
² Supply: Invesco QQQ fund element web page. https://www.invesco.com/qqq-etf/en/about.html
3 Supply for attribution particulars: Bloomberg, particularly the PORT operate, with time interval specified 12/29/23–3/22/24. Holdings are topic to vary.