00:00All right. Thank you very much for coming to the event here. We're about to talk about an ETF. I'm
00:06an ETF analyst. I'm a true ETF nerd. Every ETF has really interesting stories and facts. I think we're going
00:13to learn something here today. That was my goal. So we have 10 minutes to talk about arguably one of
00:18the, you know, I call it a stud ETF, the Qs. First question, anybody here own the Qs? Okay, a
00:24couple people. Anybody here compete against the Qs? Yeah, okay, a little more.
00:30Yeah, no, it's tough. It's one of the best performing ETFs since it came out in 1999. It's up 537
00:37% in the past 10 years. It's very difficult to beat. Only a couple active managers have managed to beat
00:43it. And this is part of the challenge for our industry is how to beat some of these indexes. So
00:48I thought, let's go into like, what exactly is this thing? Our team sometimes calls the Qs the eighth wonder
00:53of the world because it just keeps delivering these incredible returns. It's like, what is going on here?
01:00Generally, it's tracking the US stock market, but it's not really beta. It's not, you know, like the S&P.
01:06And it's not tech either. Only half of it's tech. So, you know, we have some theories. I want to
01:11get your theory. This is Mr. QQQ right here himself. How do you define the Qs? What exactly is it?
01:18Yeah, so QQQ, in my mind, what really defines it is its simplistic methodology. You know, as you alluded to,
01:26it's not beta. It's not exactly a tech fund. It is a large cap growth fund, though.
01:32Right? So it's grabbing the 100 largest non-financial companies listed on the NASDAQ stock exchange. And what we've seen
01:40through the years is just using that simple methodology, which is simpler than the S&P 500, simpler than most
01:47large cap growth funds out there, is that it's been able to be really the place to go for companies
01:54that are highly innovative.
01:57Now, you may ask, Eric, you know, how do you really know that they are innovative, right? Because over the
02:03past five years, that really has become, everyone became innovative, right, the second half of 2020, because they had to,
02:09to survive.
02:09But really, at the end of the day, you have to quantify it. And we quantify that through research and
02:15development and patent activity. So looking more specifically at research and development, your average QQQ company is spending about $17
02:25to $18 billion on R&D per year.
02:29Your average S&P 500 company is spending about $11 to $12 billion. Now, you may also say, well, Paul,
02:36there's about, there's decent overlap between the two funds now. The QQQs is only 100 companies. You're right, there's about
02:4286 different companies from NASDAQ 100 and the QQQs that are within the S&P 500.
02:48It's interesting, though, if you take those 86 companies out of the S&P 500, that R&D spend drops
02:55from about $12 billion down to about $1.7 billion. So you're looking at a multiple of about 11x there.
03:01That really is the proof in the pudding of how are these NASDAQ 100 companies innovative?
03:07Yeah, I think it is kind of innovative beta, if you will. Now, why is that? So I've thought deeply
03:13about this, as I do about ETFs, as I said, that's my job. And I call it the Steve Jobs
03:18effect. If you pull the thread on the QQs, it's like, okay, what is it? It's just companies that listed
03:23on NASDAQ. What's the big deal? Well, I think the inception moment here is in 1980, when Steve Jobs, 27
03:29years old, decided to list Apple on NASDAQ.
03:32Now, NASDAQ was not the biggest exchange. The obvious place would go to NYSE. And I think he, you know,
03:37as he did, he did it in a somewhat of a rebellious move. It was trying to get known as
03:41the tech exchange. And I think it attracted a lot of other people who, over the years, have really become
03:49to worship Steve Jobs. If you're a visionary-type tech founder, I mean, he's kind of like, you know, one
03:55of the real inspirations, probably, for your career.
03:58So I think a lot of people came over. The metaphor I use is when Michael Jordan picked Nike as
04:04his shoe brand in 1984. That was also a shocker. Nike was third, not even known as a basketball shoe.
04:10And everybody followed him there because he made Nike cool. What do you think of my theory?
04:15Well, being a Chicago guy, I appreciate the Michael Jordan analogy. And I own a closet full of Jordans. So
04:21it really was a revolution, right?
04:23But I think you're 100% right. You know, if you think about QQQ, it really is grabbing just 100
04:31companies that list on the exchange. You know, through the conversations that I've had with NASDAQ, though, that's part of
04:38their pitch, is that they have a pedigree of having technologically-focused companies list on their exchange, right?
04:45If you walk through their office off of 43rd in Times Square, you'll see big pictures of all these large
04:53tech giants going public.
04:54You have Steve Jobs up there. You have Jeff Bezos and the many others that have.
05:00And if you're a young CEO who thinks that they're going to change the world within their industry, why wouldn't
05:07you want a list on the same exchanges as those?
05:10Yeah. So if any quants are out here, can we work on the Steve Jobs factor when we get out
05:15of here? I'll meet you later. We'll write a paper on it.
05:17Anyway, okay. Speaking of Apple, Apple is one of the Mag 7. Now, the big thing in my industry and
05:23research is should you go away from the Mag 7, right?
05:27The Mag 7 make up 33% of the S&P and 40% of the Qs. Some say, this
05:32is too concentrated.
05:33We did a little digging into this. And the Mag 7, by the way, has acquired 850 companies.
05:41I mean, these are gigantic companies. The guy who covers them in Bloomberg Intelligence refers to them as small countries.
05:48They are massive. I mean, YouTube and Google is probably the best example.
05:52If you spun out YouTube, it would be like a top 20 stock in the U.S.
05:55So we call them the Mag 70. That makes us just be a little less worried about the concentration.
06:01But we do see this year people going to equal-weighted indexes.
06:06RSP is taking in a ton of flows.
06:08What's your response when someone comes and says, yeah, I like the stocks, but I don't like the weightings?
06:14Yeah. It's a common question that we get.
06:17You know, it's not uncommon for the Qs to have 48, 50% within the top 10 holdings, as you
06:23alluded to.
06:24Mag 7 makes up over 30% of the S&P 500.
06:27It makes up around 40% within QQQ.
06:30And with everything that's been going on basically since October, within questions around software, et cetera,
06:37we have gotten a lot of those questions.
06:39We've seen broadening out within the market.
06:42We've seen value taking money.
06:43We've seen small size taking money, as you alluded to, RSP taking in nearly $10 billion this year.
06:49But I think at the end of the day it brings up two different things.
06:52The first thing would be is that these companies within QQQ are the conglomerates of the 21st century.
06:59You mentioned YouTube.
07:00It doesn't stop with them.
07:01There's Amazon as well.
07:03There's Microsoft that has many other subsidiaries underneath them, Meta.
07:07You know, and it doesn't stop within tech.
07:09You have a company like PepsiCo that has a bunch of different brands that are part of the portfolio as
07:13well.
07:14So you have diversification underneath the hood, underneath that one company's ticker that a lot of people don't realize.
07:21The second thing would be is that you have to remember where QQQ typically falls within a portfolio.
07:26As much as I would love for it to replace the S&P 500, and I'd be more than happy
07:31to have an individual conversation why that should be,
07:35realistically, it's used as a bolt-on to your core holding, which is usually the S&P 500.
07:41I can understand if I hold SPY, VOO, and the top 10 holdings or MAG-7 are 30% to
07:4740%,
07:48but if you're looking at the portion of your portfolio that is supposed to be the growth engine of your
07:53portfolio,
07:54and then you think about the global economy where you have several major companies,
08:00right now it's around seven, right, that could be expanded out to eight or nine if you think about it,
08:04that have been the driver of fundamental growth over the past 10 years,
08:08why wouldn't you want a market cap with that portfolio?
08:11You know, we've seen fundamental growth within the QQQ, outpace that of the S&P 500.
08:17You have revenue growth outpacing along with earnings outpacing,
08:22so really it has been the growth engine of the portfolio,
08:26and I think you need to keep that in mind when thinking about concentration.
08:30All right, just real quick, we've got about a minute and a half.
08:32Sticking with the basketball metaphor, if the MAG-7 are the starters, give me some bench players.
08:37You know, you look at the Qs, there's 100 stocks.
08:39I looked through it last night in preparation.
08:43What are some names in there that are exciting to you that people don't really think about?
08:47Yeah, so I think if you think about QQQ, a lot of the companies that get the headlines are tech.
08:54It's 50% tech, but we like to take a look underneath the hood at some of these other companies
08:58that really have been making an impact within their own fields, intuitive surgical,
09:02which isn't necessarily a household name, but a very large, well-known company within healthcare.
09:07You also have a name that moved in more recently that a lot of people don't realize is in there,
09:14is Walmart, right, from its recent change of venues, right?
09:18So that's not exactly on the bench within there.
09:20It's a top-10 holding.
09:22But you get a lot of different exposures within there that are outside of the MAG-7,
09:27outside of tech, that really have an impact on the portfolio.
09:30Yeah, I mean, if Walmart's on your bench, that's like dream team status right there, I think.
09:35So anyway, we're out of time.
09:36Thank you very much for your attention, and thank you very much for talking about the Qs.
09:40All right.
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