Moby Waller's  Instablog

QQQQ vs SPY Performance Chart

You can see that these 2 securities largely traded in line over the past 5 years, but recently a large disparity gap has appeared in their performance.  Such discrepancies normally "come back into line" over time ... however, this trend has not shown that it is breaking down.  If the price performance gap begins to narrow, one could look at a Long SPY/Short QQQQ hedged/paired trade as a way to profit from this reverting to the mean ... with less risk than just a one-sided long or short trade.

Why is this performance anamoly occurring.  Well certainly, the QQQQ is a smaller basket (100 stocks) and is highly concentrated in growth stocks in sectors such as Technology & Biotechnology.  The SPY on the other hand comprises 500 stocks, and has large weightings in other sectors such as Financial and Energy.

I always advise to take a look at an ETF's holdings, especially in terms of concentration and diversity, to see exactly what you are trading.  With that in mind, take a look at the Top 10 Holdings of the QQQQ and SPY below (all data on holdings as of July 31, 2009):

QQQQ Top 10 Holdings


SPY Top 10 Holdings
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What you can see from this data above is that the QQQQ is a much more highly concentrated index.  The Top 10 Holdings comprise nearly 50% of the assets, with one company, Apple (AAPL) comprising over 14%.  The SPYders, on the other hand, are a much more diversified index, with less than 4% in the top holding of Exxon Mobil (XOM), and only 20% of its assets in the Top 10 Holdings.

So you can see that the QQQQ outperformance is largely due to its more intense concentration, with specifically AAPL having a big influence on its performance in 2009.  Will this trend continue ad infinitum?  Well, "is this time different"?  Are technology and biotechnology on a never-ending bullish run of performance?  Normally, we find the answer in stock market history to be "NO".  Statistical trends will often revert back to the mean.  However, because this trend has not yet begun to reverse, "don't fight the trend".  The QQQQs are outperforming, and should not be faded until they clearly begin to break down versus the SPYders.

Also, on a side note, many consider the QQQQ to be the "Nasdaq".  However, the QQQQs are only 100 stocks;  what is actually the Nasdaq is the Nasdaq Composite (COMP), which comprises all Nasdaq listed stocks.  The COMP is the index that infamously hit 5,000 in the year 2000 during the height of the Internet bubble ... it now trades around 2,100.  Take a look at the COMP Top 10 Holdings below for comparison, using the Fidelity Nasdaq Composite Index Tracking, symbol (ONEQ).  You can see that it has about 35% of its assets in the Top 10 Holdings (versus 48% for the QQQQ), and the largest holding is not APPL but in fact is Microsoft (MSFT).

ONEQ Top 10 Holdings

Moby Waller,
BigTrends.com
1-800-244-8736
Disclosure:  Short SPY Options position, short-term may be closed out at any time.