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March 29, 2017
 
 

An Index That Trades Like A Company

Who is the QQQ?

If you even just occasionally read commentary or analyst reports about the stock market, the chances are you've encountered the enigmatic symbol QQQ.  While it might be logical to assume the QQQ represents the stock symbol of some company, this is in fact not the case.  Though you can buy shares of the QQQ just like any other stock, it is, in fact, much more intricate than many people realize.  The QQQ is actually a tracking stock for the Nasdaq-100 Index. 

The Nasdaq-100 Index is a grouping of the largest (based on market capitalization) and most active companies traded on the Nasdaq Exchange.  The list is reviewed every quarter, and changes are made every year to ensure that the Index remains updated and geared towards high-performance.  Each company's contribution to the Nasdaq-100's performance is individually weighted based not only on its market cap, but other elements as well.  This prevents the biggest companies from dominating the index's performance.  The companies that make up the index are also picked with an emphasis on diversification.

The Nasdaq-100 is almost solely comprised of companies in computer hardware and software, telecommunications, retail/wholesale and biotechnology.  As such, the index is considered to be an excellent general gauge of how the ‘high-tech' industries are performing.  As such, most analysts use the performance of the 100 as an important benchmark.

The tracking stock for the Nasdaq-100 is designed to follow the performance of the index as closely as possible.  A share of the QQQ represents a unit of interest in a unit benefit trust, which holds shares of the individual companies traded on the 100.  By buying just one share of QQQ, an investor actually buys pieces of an array of companies on the Nasdaq-100.  The QQQ can actually offer the diversity of a mutual fund, while still being traded as easily as a stock.  The QQQ is traded on the American Stock Exchange (AMEX).

While it is impossible to exactly replicate the performance of the 100, the QQQ trades consistently at almost 1/40th the value of the Nasdaq-100 Index.  That makes the stock's share price low enough to be easily bought and sold by the average investor.  No additional fees are charged beyond the normal broker's commission.  The pricing of the QQQ occurs continuously throughout the trading day, during normal AMEX hours. 

By trading like any other stock, the QQQ is able to offer an excellent trading vehicle for both beginning and advanced investors.  Any reputable broker should be able to buy and sell shares of the QQQ.  The stock can also be sold short, subject to the same terms that apply to other stocks.  In this way, investors can profit declines in the Nasdaq-100 as well as rallies.  There are also an assortment of call and put options available for the tracking stock -- for the more advanced traders.  The QQQ can also be traded in IRA and 401(k) portfolios.

QQQ performance

Like the Nasdaq, the QQQ's share price has been trading down significantly over the last year.  This is no fault of the managers of the tracking stock; they have simply allowed the QQQ to perform the same as the Nasdaq-100.  While the QQQ does have similarities to a mutual fund, it is very important to note that the holdings behind the QQQ are not actively managed for top performance.  The overseers of the tracking stock will not try to beat the performance of the Nasdaq-100, even if that index is declining. 

Historically, the QQQ has succeeded in doing a very good job of following the Nasdaq-100.  That is one reason that so many fund managers consider the QQQ such a powerful tool, and actively use it in their portfolios.  Like the Nasdaq-100, the QQQ has experienced an average growth of about 11% per year over the last 15 years.  Of course, this is no guarantee of future performance -- as the poor performance of the last 12 months certainly proves.

Like any security, it is important to know before you buy.  The QQQ is no different.  But while many types of tracking stocks are strictly geared towards professional traders, the QQQ is simple enough for the average investor to understand and take advantage of. 


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