What can stop this ETF?

The Nasdaq has been a guarantee for excellent performance for years. Investors have the opportunity to get a real return turbo in their portfolio with an ETF on the Nasdaq-100. But how long can the rally in the tech sector last?

The incredible performance of the Nasdaq

In the past decade, only very few indices managed to soar as high as the Nasdaq-100. Over the past 10 years, the index has performed at nearly 500 percent. Particularly impressive was the rapid rise in the price of the index immediately after the stock market crash in spring this year. While other major indices such as the S&P 500, the Dow Jones or the MSCI World have each made an amazing comeback in their own right, the Nasdaq-100 looked almost unleashed.

The Nasdaq-100 includes the 100 NASDAQ-listed stocks with the highest market capitalization that are not financial companies. The index thus covers the largest technology companies in the USA. In addition to the giants Apple, Microsoft, Amazon, Alphabet and Facebook, this also includes numerous high-growth companies such as Nvidia and Qualcomm or trendy companies such as Tesla and Zoom.

The strengths of the EQQQ

If you want to benefit from the strong performance and great potential of the US technology sector, you can choose from several ETFs. Both the Amundi and ComStage funds impress with their low TER and good tracking difference. However, both products are synthetically replicated ETFs. Although this form of mapping is well secured, some investors still have reservations about getting such a fund into their custody account.

However, there is an extremely popular alternative. The Invesco EQQQ NASDAQ-100 UCITS ETF is one of the most traded ETFs in Europe. Invesco’s matching QQQ is even one of the most popular ETFs in the world. With a fund size of around 3.3 billion euros, the EQQQ has an enormous fund volume. Its TER is 0.30 percent. This makes it slightly cheaper than its closest competitors, the two Nasdaq-100 ETFs from iShares. However, this slight cost advantage expands quite significantly if the significantly better tracking difference of the EQQQ is taken into account. With a deviation of 0.12 percent, it is just behind the leader from Amundi.

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The EQQQ regularly distributes its income to its investors. This makes it ideal for investors who want to have part of the return on their assets made available on a regular basis. Due to the extremely strong price growth in the US tech industry, the EQQQ is nevertheless also very suitable for long-term asset accumulation.

Strong in breadth, even stronger at the top

Some of the fastest growing companies in the US economy are on the Nasdaq-100. A look at the composition of the index shows that with a corresponding ETF you can add a whole range of high-yield and high-growth jewels to your portfolio. A Nasdaq-100 ETF is therefore very well positioned despite the clear number of companies it contains.

Likewise, the Nasdaq-100 is increasingly dominated by a few tech giants. Apple, Amazon and Microsoft alone can combine around 35 percent of the index. This is not surprising as these are the most expensive companies in the world and the weighting of the index is based on market capitalization. On the one hand, the enormous focus on a few companies poses a certain risk for investors. Companies like Amazon and Microsoft are also among the big beneficiaries of digitization.

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Since the Nasdaq-100 is a pure technology index, the corresponding ETFs are completely dependent on the future development of this industry. As long as the price rally in the tech sector continues, investors will benefit immensely from this strong focus. The Nasdaq-100 explicitly excludes financial stocks from inclusion. These would bring a little more diversification to the index. However, they are noticeably falling behind pure tech stocks in terms of their growth potential. Those who bet on the Nasdaq-100 will be rewarded with a highly concentrated growth fund.

Bright prospects or the next internet bubble?

However, given the staggering highs in the prices of many US tech stocks, the question arises as to how far this growth trend can continue. Experts have been warning for months that the stock market is increasingly decoupling from real economic developments. According to many investors, the tech sector in particular is now overheated.

Nowhere is this more evident than with Tesla stock. Their price rose by an unbelievable 600 percent within a year. The electric vehicle manufacturer recently managed to post black figures for four quarters in a row. However, this in no way justifies the extremely high valuation of the company. In the past few days, Tesla shareholders have felt that this development cannot be continued indefinitely. The share lost more than 20 percent of its value in just three days.

Some other tech stocks have also seen a long-awaited price correction since early September. With Apple, the world’s most valuable company in terms of market capitalization, lost around 10 percent of its value. Other tech stocks have also been penalized by investors. Since the beginning of September the Nasdaq-100 has lost around 10 percent of its value. The question is therefore justified whether this price slide represents the temporary end of the tech hype on the stock exchanges or whether this is just a short hiccup.

That is why the Nasdaq will continue to be at the forefront in the future

Even if one is of the opinion that the current prices of the big tech companies are too high, there is no question that these companies have been among the big winners of digitization for some time. Technologies such as artificial intelligence and the cloud have developed into huge and highly profitable markets in a relatively short period of time. The internet has become indispensable in many areas of economic and social life.

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More than anything else, the US tech sector is at the center of this development. It is true that more and more powerful competitors from China are appearing on the scene. For the foreseeable future, however, it is unlikely that one of the great US giants will be overthrown by an up-and-coming Chinese competitor. The increasing dichotomy of the Internet and the worsening economic conflict alone should ensure this.

At the same time, the potential that lies in the tech sector is still huge. In the course of the great megatrends of the future, the importance of already established technologies such as cloud computing and big data is likely to increase even further. At the same time, numerous new innovations such as edge computing or blockchain are already in the starting blocks. Many everyday products are increasingly being networked with one another and upgraded with elements of the cloud or with AI. It is therefore very likely that the tech industry and thus the Nasdaq-100 will also be among the big winners in the coming decade.

What is the best way to use a Nasdaq-100 ETF?

ETFs like the EQQQ show an extremely strong performance. At the same time, due to their exclusive focus on a single sector and a single country (with a few exceptions), they are not necessarily suitable to form the sole basis of a portfolio. However, if you already have at least one broad-based ETF in your portfolio, you can get an extremely profitable fund on board with a Nasdaq-100 ETF.

Investors should not be put off by temporary price fluctuations. Short-term corrections are the result of a hot market. However, IT and other related technologies now have too great an impact on human society and the economy for the current trend to reverse again in the foreseeable future. Individual companies could well be replaced by emerging competitors over time. The individual success of giants like Apple is by no means set in stone forever. The tech industry as a whole is unlikely to be affected.

The Invesco EQQQ NASDAQ-100 UCITS ETF at a glance:

  • Name: Invesco EQQQ NASDAQ-100 UCITS ETF
  • ISIN: IE0032077012
  • WKN: 801498
  • Replication Method: Physical
  • Ongoing costs (TER): 0.30%
  • Use of income: Distributing
  • Inception date: November 25, 2002
  • Fund size: EUR 3,300 million
  • Tradable at ua Smartbroker*, Consorsbank*, comdirect*

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