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
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
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)
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.