When it comes to creating the Mount Rushmore of exchange-traded funds (ETFs), the Invesco QQQ ETF (QQQ ) has to be in the conversation. Since 1999, the fund has been the go-to option when it comes to getting Nasdaq 100 exposure all within the confines of a single fund. That said, the industry has evolved the past 25-plus years and the current unit investment trust (UIT) structure that it built its foundation upon has become antiquated. The fund is now close to modernization as it seeks proxy votes from shareholders to approve the reclassification.
“The pending conversion of QQQ will be a good thing for existing shareholders by bringing the product into the modern age of ETFs and lowering its expense ratio,” said TMX VettaFi Head of Research Todd Rosenbluth, who noted this summer that the fund was due for a modern makeover it filed for reclassification in mid-July. “QQQ will still be a great way to get exposure to large-cap growth companies in the U.S.”
Almost Official
In order to make the change, Invesco will need to procure 51% approval from shareholders. Bloomberg reported that it fell just short of its December 5 goal, but has moved the deadline to December 19 — two more weeks to make it official. Invesco noted that shareholder response for the reclassification has been mostly favorable.
“Shareholder participation in the proposals for the Special Shareholder Meeting (the Meeting) for Invesco QQQ Trust, Series 1 (QQQ) has continued to be strong, and votes cast are overwhelmingly in favor of the proposals,” Invesco said of the December 19 adjournment, noting that this is “typical for proposals like this, and your vote can help get these beneficial proposals across the finish line.”
Since the initial announcement this summer, Invesco has made a concerted effort to secure the necessary number of proxy votes. This includes hitting the phones so current shareholders receiving a number of telephone calls need not be alarmed.
Why the Change?
As Rosenbluth and Invesco’s proxy vote campaign noted, the primary benefit would be a lower expense ratio. The natural evolution of the ETF has made it more cost-effective, which is one of its inherent benefits when compared to its mutual fund counterparts.
When approved, the reclassification will bring the fund’s expense ratio down to 0.18 from 0.20. It might seem like a minor change, but when you account for the sheer size of the fund (over $400 billion in assets under management), that could lead to substantial savings. Morningstar noted that it could translate to savings of “nearly $70 million in aggregate.”
Lower fees are the primary benefit of the reclassification, but there are other inherent benefits for QQQ to become an open-end fund. Because the fund is currently structured as a UIT, this limits the ability of QQQ’s portfolio managers to reinvest dividends, use derivatives for equitizing cash, or to lend securities.
Overall, the low cost and efficiency should bring a leaner, meaner iteration of the QQQ.
“The unit investment trust is an outdated structure that has inefficiencies and it’s time to get into the new century,” said Sam Huszczo, a Michigan-based certified financial planner.
"All My QQQ Children"
Like a successful television program leading into other spin-offs, the popularity and success of QQQ has spawned various iterations. Investors have the ability to tailor QQQ exposure to suit their specific portfolio needs and preferences.
Since it tracks the Nasdaq 100, QQQ has been the prime choice for tech exposure and a model template for funds that want to mimic the strategy in other countries. Take the +*Invesco China Technology ETF*+ (CQQQ ) for example. The fund tracks the FTSE China Incl A 25% Technology Capped Index. It includes constituents of the FTSE China Index and FTSE China A Stock Connect Index. As such, it adds exposure to China A-shares as well as China B-shares within the movers and shakers of China’s tech sector.
“I think what’s unique about this ETF is that it gives you exposure to many of these China technology companies focusing on hardware that we just don’t see in some of the other portfolios,” said Rene Reyna, head of thematic and specialty product strategy at Invesco, in an interview with TMX VettaFi. Reyna noted that “the growth opportunity is going to be on the hardware side just because of China’s commitment.”
Other ETF providers have also taken the QQQ playbook and created their own versions of the fund. The ProShares Nasdaq-100 Dorsey Wright Momentum ETF (QQQA ), for example, uses constituents within the Nasdaq 100, but focuses on names exhibiting strong momentum via a proprietary relative strength indicator (RSI). In addition, those seeking an equal-weighted strategy can look to the Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE ).
It’s a reminder of the impact QQQ has had on the ETF marketplace and the general investing populace—the power of three Qs.
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