ETFs that track the Nasdaq-100 are increasingly popular for advisors seeking mega-cap growth exposure and a focus on innovative sectors
This index can be a potent source of large-cap growth exposure for your clients portfolios.
While the S&P 500 index is a staple in the portfolios of many advisors and retail investors, in recent years it has been somewhat overshadowed by the Nasdaq-100 index.
Over the last decade, the Nasdaq-100 has significantly outperformed the S&P 500, largely driven by its heavy weighting towards "new economy" sectors such as technology, consumer discretionary, and communication services.
Source: Bloomberg as of Aug 31 2024. Note you can not invest directly in an index.
This index includes industry giants known as the "magnificent seven"—Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla, and Meta Platforms.
Today, ETFs that track the Nasdaq-100 are increasingly popular for advisors seeking mega-cap growth exposure and a focus on innovative sectors. Here’s what you need to know.
What is the Nasdaq-100, and how does it work?
The Nasdaq-100 Index aims to reflect the performance of the 100 largest non-financial companies listed on the Nasdaq stock exchange, measured by market capitalization.
This exclusion of financial sector stocks such as banks, insurance companies, and asset managers means that it offers a distinct composition compared to broader market indices like the S&P 500.
Notably, the Nasdaq-100 has a pronounced emphasis on "new economy" sectors—characterized by significant exposure to technology, consumer discretionary, and communication services, while maintaining minimal involvement in sectors like energy, materials, and industrials.
Sector Breakdown: Nasdaq-100 Index
Source: Nasdaq.com, 9/12/2024
The Nasdaq-100 is maintained through both quarterly reviews and annual reconstitutions. Reviews ensure that constituents continue to meet the index's stringent criteria, checking factors such as liquidity and excluding any companies undergoing bankruptcy proceedings. The annual reconstitution updates the roster of companies to reflect changes in the market, adding or removing companies as necessary.
Stylistically, the Nasdaq-100 is skewed towards the "large growth" category within the equity style box. According to data provided by Nasdaq, from 2003 to 2021, companies in the Nasdaq-100 index demonstrated an average compound annual growth rate (CAGR*) of 21% in earnings, 13% in revenues, and an impressive 26% in dividend value. 1
How to invest in the Nasdaq-100
The Nasdaq currently lists hundreds of investment products tied to the Nasdaq-100 index, ranging from mutual funds and futures to index options and exchange-traded funds (ETFs). For Canadian investors and advisors, BMO offers a trifecta of solutions in ETF form giving you flexibility to find an effective exposure for your portfolios:
- BMO Nasdaq 100 Equity Hedged to CAD Index ETF (ZQQ)
- BMO NASDAQ 100 Equity Index ETF (ZNQ)
- BMO Nasdaq 100 Equity Index ETF (USD Units) (ZNQ.U)
The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
To hedge or not to hedge?
All three ETFs track the Nasdaq-100 Index with a management fee of 0.35% and feature identical top holdings, yet they cater to different investor needs regarding currency exposure:
- ZQQ: As a currency-hedged ETF, ZQQ mitigates the impact of USD/CAD fluctuations. This strategy is advantageous if you want to avoid currency-induced volatility in your investment returns. The hedging adjusts the ETF’s exposure so that changes in the exchange rate do not affect the ETF's value as directly.
- ZNQ: This ETF exposes you to currency fluctuations because it is not hedged. When the USD appreciates against the CAD, the value of ZNQ's holdings effectively increases when measured in CAD, potentially boosting the ETF's performance. Conversely, if the CAD appreciates against the USD, the value of the ETF's holdings may decrease in CAD terms, which could negatively impact performance.
- ZNQ.U: Aimed at investors with US dollars, this version of the ETF allows you to invest directly using USD without worrying about immediate currency exchange implications. It provides straightforward exposure to the Nasdaq-100 without the overlay of currency conversion impacts that affect the CAD-denominated ETFs. It also allows investors with USD to invest to keep their funds in that currency in a Canadian listed ETF which is not considered foreign property, and therefore not subject to the T1135 reporting requirement, and generally not considered to be U.S. assets for U.S. estate tax purposes.2
These BMO Nasdaq-100 ETFs can be particularly valuable for Canadian portfolios as they complement domestic equity ETFs that are typically weighted heavily towards financials and energy—sectors where the Nasdaq-100 has less exposure.
Disclaimer
Standardized performance for ZNQ, ZNQ.U and ZQQ: as of Aug 31 2024 ZNQ – 1 yr (26.34%), 3 yr (10.65%), 5 yr (21.22%), Since Inception (Feb 15 2019, 20.99 %). NQQ – 1 yr (25.16%), 3 yr (6.98%), 5 yr (19.54%), Since inception (Jan 19 2010, 17.05%). ZNQ.U – 1 yr (26.67%), 3 yr (8.24%), Since inception (Feb 12 2021, 10.67%).
*The compound annual growth rate (CAGR) is the mean annual growth rate of an investment over a period longer than one year.
1 Nasdaq.com: N-100_Insurance_Solutions_Overview (nasdaq.com)
2 As long as the Canadian funds are treated as corporations for U.S. tax purposes.
This article has been sponsored by Nasdaq.
All investments involve risk. The value of an ETF can go down as well as up and you could lose money. The risk of an ETF is rated based on the volatility of the ETF’s returns using the standardized risk classification methodology mandated by the Canadian Securities Administrators. Historical volatility doesn’t tell you how volatile an ETF will be in the future. An ETF with a risk rating of “low” can still lose money. For more information about the risk rating and specific risks that can affect an ETF’s returns, see the BMO ETFs’ prospectus.
Changes in rates of exchange may also reduce the value of your investment.
Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.
The viewpoints expressed by the author represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
This article for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
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