A Lower-Risk, Lower-Reward Strategy For Gaining Exposure To Apple

| About: Apple Inc. (AAPL)

While I do believe in the long-term prospects of Apple (NASDAQ:AAPL) and have recently created a long position via outright shares (in my trading account), I was looking for a safer, less volatile manner of gaining exposure in my IRA account. I did not wish to suffer through heavy volatility and violent price swings. After all, I am saving this money for the long-run and while I truly believe that Apple with regain its swagger, I am not ready to go through the trouble of being very overweight this company.

To counter this problem I have looked to the PowerShares QQQ Trust ETF (NASDAQ:QQQ). The fund has a high concentration of its assets allocated to Apple. At 18% of invested assets, Apple represents the largest holding in the ETF. Although this allocation is not as high as it was in the past -- about 20% in the fall of 2012 -- it still allocates a significant overweight position in the company.

Aside from having a large portion of Apple in its holdings, the QQQ has 55% of its total assets spread out among the top 10 holdings, (~37% in holdings 2 through 10). The second largest holding is the blue-chip dog, Microsoft (NASDAQ:MSFT) at 7.33%. However, with companies such Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Qualcomm (NASDAQ:QCOM) rounding out the third, fifth and sixth top holdings, I am more confident in the longer-term growth ability of this fund. Below is the complete top ten holdings:


Fund Holding (%)

YTD Return (~%)































I find that the QQQ fund is a solid investment choice because it limits volatility through diversification, while still having nearly 1/5 of its allocated assets in Apple. This allows investors to gain exposure to Apple, with even less downside risk than the shares currently offer. The QQQ has also historically outperformed the S&P 500 (NYSEARCA:SPY) over multiple long-dated time frames.

My goal here is to highlight an alternative method to owning shares of Apple. One could also limit risk and leverage their reward by purchasing call options of Apple. However, many are not familiar with, or care for, using options. That's why I'm attempting to outline a simple strategy for conservative investors who want a piece of the Apple action, without risking as much money or volatility.

To shed some light on the volatility, let's take a look at the violent price swings of Apple, beginning in January of 2012. To make the comparison fair, we'll also examine the price movements of the QQQ fund over the same period. Below are the results.

Apple's Price Swings:

Time Frame

Price Range

Change ($)

Change (%)

January - April

$410 - 640



April - May

$640 - 522



May - September

$522 - 705



September - November

$705 - 505



Mid-November - Beginning December

$505 -$590



December - January

$590 -$435



Note: All time frames above, with the exception of the last row, are from 2012.

QQQ Price Swings:

Time Frame

Price Range

Change ($)

Change (%)

January - April

$57 - 68



April - June

$68 - 60



June - September

$60 - 70



September - November

$70 - 62



November - Present (2/05/13)

$62 - 67.50



Note: All time frames above, with the exception of the last row, are from 2012.

As you can see on the two tables above, Apple is far more volatile than the QQQ fund. Apple's largest positive move from the above time frame is +56%, while its largest drawdown is a horrendous -28% (and -38% if you look at the peak-to-trough drop from the $705 September top to the $435 post-earnings bottom in late-January). Likewise, the QQQ's largest move up was good for 20%, while its largest pullback within the given time frame is down 14%.

While the QQQ's up move is nowhere close to that of Apple's, the pullback is nowhere near as bad. It's also worth nothing that within the given time frame (January 2012 - present) the QQQ has outperformed Apple, +18.6% to +11.33%, respectively. It has also outperformed Apple year-to-date, +4% to -14%, respectively.

QQQ vs. Apple (January 2012 - Present)

Source: E-Trade

QQQ vs. Apple Year-To-Date

Source: E-Trade

Another compelling reason to own the QQQ is that it's better than your typical index fund. Investors who disagree with owning the QQQ ETF over outright shares of Apple will likely counter with sheer disagreement over owning an index fund in the first place. They would likely argue that Apple shares currently offer a favorable risk-reward entry point and an index fund is too bland or diversified.

I would have to agree that Apple does indeed offer a favorable entry point based on downside risk. However, the QQQ fund has held up rather well over the past six months, especially compared to Apple, which has struggled mightily, down over 25% while the QQQ is still in positive territory.

Although QQQ has a large allocation in Apple, this shows that the QQQ can still perform well, even during large draw downs in Apple. This is mainly due to the outperformance of its other top holdings, such as Google, Amazon, and Microsoft, among others.

The QQQ fund is also better than your typical index fund based on the long-term outperformance of the S&P 500. Over the 3-year, 5-year and 10-year periods, the QQQ has outperformed the S&P by a rather large amount. To quickly review those figures, I have a simple table below. Beneath the table are charts for the given time frames as well.

QQQ Return vs. S&P 500 Return

Time Frame


S&P 500










QQQ vs. S&P 500 3-Year Return

Source: E-Trade

QQQ vs. S&P 500 5-Year Return

Source: E-Trade

QQQ vs. S&P 500 10-Year Return

Source: E-Trade

The point that I'm really trying to drive home is that owning the QQQ fund is a great way to get exposure to Apple, while still outperforming the broader indices. Not only do you get exposure to Apple, but you also suffer through less volatility and therefore, less worry. This strategy can give you peace of mind and allow you to sleep at night.

Now Apple does have a great story, and I do believe in it in the long-term. But investors have to be conscious of risk, and as Apple shares have shown in the past year, there certainly are some risks involved. While it appears that Apple currently offers a favorable risk to reward entry point (see my Seeking Alpha article on my bullish stance), conservative investors who are seeking exposure can pursue different avenues of being long, all with less volatility and risk.

It's not that I don't think Apple will do well over the long-term. But as an investor of both assets, I sleep much better knowing that my retirement money is invested in a diversified fund that relies on other companies to do well, with an added boost of Apple's long-term future prospects (since 18% of the fund is comprised of Apple). Should Apple stumble and continue to fall, which it may, I can rest easily knowing that other growth companies will pick up the slack and help my position continue to outperform the broader markets.

Disclosure: I am long QQQ, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.