- Invesco QQQ ETF underperformed the S&P 500 Index as the rotation into value-oriented sectors continued and investors position portfolios to take advantage of an economic reopening.
- Invesco QQQ ETF’s lack of exposure to the Financials and Energy sectors, its underweight to the Industrial sector and poor performance within the Consumer Discretionary sector weighed on relative performance vs. the S&P 500 Index.
Invesco QQQ ETF (QQQ) saw Q1 (12/31/2020 – 3/31/2021) total return of 1.71%, and underperformed the S&P 500 Index, up 6.17%. The rotation into value-oriented sectors continued and investors looked towards companies and sectors that stand to benefit from a post-COVID reopening of the economy. The main drivers of QQQ’s relative underperformance versus the S&P 500: QQQ’s lack of exposure to the Financials and Energy sectors which were the best two performing sectors in the S&P 500 for the second consecutive quarter, its underweight to the Industrials sector, and poor performance from the Consumer Discretionary sectors.
The Financials sector, which represented an average weight of 10.96% within the S&P 500, traded higher by 16.00% for Q1. Financials were aided by higher rates, as the yield on the 10-year Treasury surpassed 1.70%, the highest levels since January 2020 in over a year. Rates rose as investors priced in broad based economic growth amid inflation fears. In the middle of the quarter (February 17th) the Bureau of Labor Statistics announced that the January Producer Price Index grew by 1.3%, the largest monthly increase since the reading was amended in 2009. On March 17th, the release of the February Producer Price Index (which measures the average of change over time in the selling prices received by domestic producers for their output) showed the highest year-over-year increase in prices paid to producers since October 2018. Producers have been faced with higher transportation and raw materials costs as COVID-related labor restrictions and intermittent closures in businesses over the past year have been blamed for higher costs.
Fed Chairman Jerome Powell addressed inflation concerns multiple times during the quarter by referencing that a full economic recovery is some time away and has reiterated the Fed’s accommodative stance in policy. In their statement on March 17th, the Federal Reserve noted that there could be a transitory increase in inflation for the year and increased their core inflation forecast to 2.2% in 2021, followed by 2% in 2022. Further, the Fed revised their forecast for US GDP higher to 6.5% growth for the year, versus their previous forecast of 4.2% growth. They also lowered their unemployment forecast to 4.5% for 2021 and 3.5% for 2023. QQQ does not have exposure to the Financials sector as of 4/5/2021.
The Energy sector was the best performer in the S&P 500 Index for Q1, after it advanced by 30.88%. Energy companies were aided by higher oil prices as the WTI Cushing Oklahoma Crude Oil Spot Price (the spot price of West Texas Intermediate crude oil delivered at Cushing, Oklahoma) increased by 21.93% in Q1. Seasonal issues were at play as much of the United States experienced a polar vortex over the month of February. Texas saw freezing temperatures that affected electricity, supplies and water and as power outages raged, a number of refineries were forced to shut down in response. March brought one of the stranger situations in recent memory; the Ever Given a 1,300+ foot cargo ship was pushed by sandstorm winds and became stuck in the Suez Canal on March 23rd. The Canal, an incredibly important route for global trade was blocked for nearly a week and created a backlog of almost 400 ships carrying everything from oil to cattle. Oil prices climbed during the ordeal, until the ship was freed on March 29th.
The Consumer Discretionary sector is one of QQQ’s largest relative overweights against the S&P 500 Index with an average weight of 18.98% during Q1 vs. the S&P 500 Index’s average weight of 12.61%. Within QQQ, the sector was down by 4.15% while it was up by 3.12% within the S&P 500 Index for the quarter. Amazon and Tesla were down 5.00% and 5.45% respectively over the course of Q1 which dragged down relative performance.
Similarly, poor performance within the Industrials sector hurt relative performance vs. the S&P 500 Index. The Industrials sector comprised an average weight of 1.80% within QQQ during Q1 and traded lower by 1.14%. Within the S&P 500, the sector averaged an 8.42% weight and increased by 11.29% over the same time period.
Source: Bloomberg L.P., as of April 5, 2021.
Note: All periods represent calendar years. Click for standardized performance. Performance data quoted represents past performance, which is not a guarantee of future results; current performance may be higher or lower than performance quoted. Investment returns, and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. See invesco.com to find the most recent month-end performance numbers. Market returns are based on the midpoint of the bid/ask spread at 4 p.m. ET and do not represent the returns an investor would receive if shares were traded at other times. An investor cannot invest directly in an index. Index returns do not represent Fund returns. High, double-digit and/or triple-digit returns are highly unusual and cannot be sustained.
Single Stock Performance
The best-performing stocks in QQQ for Q1 were Applied Materials, up 55.09%, Walgreens Boots Alliance, up 38.98% and Intel, which advanced by 29.22%. The worst performers for the quarter were Peloton Interactive down 25.89%, Pinduoduo, down 24.65% and Seagen down 20.71%.
Market Drivers & Outlook
The recovery/reopen trade so far this year has been fueled by widespread vaccinations coupled with additional stimulus from the federal government. With three vaccines being administered under the FDA emergency use authorization, the pace of vaccinations has increased. President Joe Biden doubled his goal of 100 million vaccinations to 200 million in the first 100 days in office, after his initial target of was surpassed after 59 days.
After some debate, Congress passed the $1.9 trillion coronavirus relief bill. The bill included $1,400 checks to the majority of Americans, an extension of unemployment benefits, the extension of the child tax credit and assistance for mortgage payments as well as renters. Billions were earmarked for vaccine manufacturing/distribution, for state and local governments as well as schools and restaurants. The additional aid comes as states continue to rollback restrictions on businesses in various degrees, and indicators of a return to normalcy like sporting events with fans in the stadium begin to become more common.
The employment picture improved in the first quarter as the labor force continued to return to work. Initial Jobless claims has been in a downward trend since early April of last year, when over 6.1 million American filed for unemployment benefits in a week. From the week ended March 20, 2020 until the week ended March 19, 2021, every weekly reading of initial jobless claims was higher than the previous all-time high of 695K set in October of 1982. In the week ended March 19, 2021 claims hit a 1-year low at 658K and dipped below that previous all-time high level.
Source: Bloomberg L.P., as of April 5. 2021
The next round of legislation making its way through Congress is President Biden’s $2 trillion infrastructure bill. Key components of the bill include: over $600 billion to upgrade the country’s transportation infrastructure through roads, bridges, public transportation and development towards electric vehicles; nearly $600 million to revitalize domestic manufacturing; $400 million for aid towards the disabled and elderly; and $300 million in water initiatives (replacing drinking water pipes) and internet infrastructure through broadband. Preliminary comments point to more challenges in passing this bill, largely because it is expected to be funded through tax hikes. The bill proposes and increase in the corporate tax rate to 28% and regulations around profits earned overseas. Republicans, some moderate Democrats and the US Chamber of Commerce have spoken out against the tax hikes.
At the end of April, the QQQ heavyweights: Apple, Amazon, Microsoft, Alphabet and Facebook will all report earnings. In the most recent round of quarterly earnings, these QQQ heavyweights seemed to flex their earnings and sales muscles. On an absolute basis, each of the QQQ heavyweights announced the highest quarterly EPS and highest quarterly revenue figures in their respective companies’ history. Within the announcement we saw two $100 billion sales quarters (from Apple and Amazon) doubling the number of companies that have surpassed that target on a quarterly basis (Wal*Mart and Exxon Mobil are the other two). While investors should not expect record-breaking numbers on a quarterly basis, the quarter was a strong showing from the heavyweights.
Within earnings transcripts for each of these companies it became apparent that these companies have made significant investments and reference disruptive technological themes such as cloud computing, electric vehicles, 5G, e-commerce, streaming entertainment, big data, virtual reality. References to increased R&D spend and innovation were apparent as these companies continue their commitment to push the envelope in new and emerging business lines. As this quarter showed, QQQ heavyweights have continued to deliver on bottom-line results, and we believe that they are very well positioned to capture increasing demand for many transformative themes across the marketplace.
Commentary within this next round of earnings reports will be interesting to digest as companies and consumers are positioning for life beyond COVID: dynamics that have shifted as a result, customer changes in demand, changes in supply constraints, and overall effects on business lines. Investors’ short-term attention seems to be focused on value-oriented sectors and securities that may benefit from the full reopening of the economy. However, we believe that many of the changes brought on by the pandemic will be lasting. Not only from the standpoint of the work environment, but in the ways we interact with others and live our lives on the whole.
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