A widely held investing belief is that growth and technology stocks are vulnerable to rising interest rates. That was confirmed in 2022. That’s when the Federal Reserve initiated the process of taking rates to the highest levels in two decades.
Indeed, 2022 was a dismal year for growth-heavy ETFs like the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ). The two ETFs shed 32.6% in 2022. But they’ve rebounded nicely since then. That indicates high-quality growth stocks can prove resilient against the backdrop of higher interest rates.
Moreover, both funds entered Wednesday with year-to-date gains of 11.1%. That indicates the holdings in these ETFs are able to notch upside even in a higher-for-longer environment. Regarding the impact of interest rates on QQQ/QQQM firms, some are gaining an overlooked benefit. That is that they’re minting significant amounts of cash. And that’s because their cash holdings, some of which are ample, are gaining better interest payments.
Intriguing Interest Phenomenon for QQQ Holdings
As reported by Bloomberg, about 10% of the nonfinancial companies in the S&P 500 — 36 companies overall, — earned more in interest income in the first quarter than they allocated to interest on their outstanding liabilities.
That group includes several marquee members of the QQQ/QQQM portfolios. The standout is the semiconductor giant Nvidia (NVDA) — a stock that represents about 8% of the ETFs’ rosters.
“One standout is chipmaker Nvidia Corp., which reported $359 million in interest income for the first quarter, more than double what it earned during the prior-year period and enough to cover quarterly interest expense of $64 million. Nvidia also reaped enough interest income to cover its $98 million dividend — the only member of the S&P 500 to do so during the quarter,” according to Bloomberg.
Typically, companies with large cash stockpiles stash that capital in money market funds, short-term Treasurys, and other low-risk cash instruments. In low interest rate environments, that cash essentially collects dust. But these days, it’s arguably a new revenue stream for some QQQ/QQQM holdings, although that interest isn’t classified as such.
“For the companies that report higher interest income than interest spending, interest income leaped almost 60% to $6.9 billion, compared with the first quarter of 2023. Meanwhile, interest expense increased only 5% to $2.84 billion,” noted Bloomberg.
Alphabet (GOOG) and Tesla (TSLA) combine for 7.84% of the QQQ/QQQM portfolios. They are also among the companies reaping windfalls of interest income.
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