Beyond cash, finding “safe” investments is not an easy task. It’s one made more difficult when market participants attempt to combine safety with upside potential. But safety is in the eye of the beholder, and that’s true at the sector level. ETFs such as the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ) could provide investors with more safety than they expect. Owing to the tech-heavy rosters found with QQQ and QQQM, the ETFs are home to profitable, lower leverage, steady earnings generators.
The same cannot be said of some ETFs devoted to so-called defensive sectors. Those include some groups with highly leveraged companies with volatile earnings patterns. More than two decades removed from the bursting of the dot-com bubble, some investors don’t view large- and megacap stocks as safe assets. Perhaps they should.
Favorable Traits for the Tech-Adjacent Sector
QQQ and QQQM have the same rosters. They include roughly 50% allocations to the tech sector and nearly 16% weights to the tech-adjacent communication services sector. These days, those could be favorable traits for investors looking to avoid volatility.
“One important reason that large-cap technology stocks have held up, despite the surge higher in interest rates: these companies generate strong cash flow,” noted BlackRock. “Contrast this with their younger, early-growth cousins. Early growth companies are down roughly 30% from the July peak. The backup in interest rates has been particularly punishing for these companies because their cash-flow is in the distant future. Put differently, a higher discount rate has a more negative impact on early growth companies than those with significant near-term cash flow.”
Earnings are another reason QQQ and QQQM could prove to be safe equity-based ETFs on a relative basis. Not only are tech earnings per share forecast to drive S&P 500 earnings growth through the first half of 2024, the sector’s earnings trajectory is increasingly predictable. That’s a relevant point when considering market participants disdain negative earnings surprises.
“There’s another distinguishing characteristic of these companies. Not only are they highly profitable, but their profits are remarkably consistent,” added BlackRock. “The large, ‘platform’ companies have strong entrenched user bases and consistent demand. And with interest rates high and the economy likely to slow from here, consistency is becoming more important to investors.”
Bottom line: QQQ and QQQM are valid considerations for investors looking for reliability and those wanting to eschew volatility.
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