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SA Editor Jonathan Liss
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  • Why QQQQ Was My Conviction Pick for 2009 0 comments
    Dec 30, 2009 6:41 PM

    For a broad U.S. Market Index, PowerShares QQQ ETF (QQQQ), which tracks the Nasdaq 100 Index had a hell of a year - up 55% as of today's close. It handilly outperformed a range of broad market equivalents including SPY, DIA, IYY, VTI and IWV. Even growth-heavy (and thus more similar stylistically) IWZ and IVW underperformed QQQQ by nearly 20 points or more.

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    To me, an ETF's underlying holdings are key. In QQQQ's case, the heavy weighting towards a few tech names - most notably Apple (NASDAQ:AAPL) which was upwards of 15% of the fund as of today's close - made the fund an easy choice for me to load up on for both my own and my kids' college funds over any of the other broad index funds mentioned above.

    IndexUniverse Editor in Chief Matt Hougan made the following points about the QQQQ back in November 2007:

    I've pointed this out time and again, but the Nasdaq-100 is a flawed index. First, many people take it as a proxy for "technology," which it is not: only 65% of the fund is devoted to technology, with the rest tied up in healthcare, consumer discretionary and more.

    But more importantly, the index's unusual weighting methodology — somewhere between market cap weighting and price weighting — means that the weights assigned different components are entirely out of whack. For instance, Microsoft (NASDAQ:MSFT) is twice as large a company as Apple (AAPL) ($346 billion vs. $164 billion), but Apple has twice the weight of Microsoft in the index (12.3% vs. 6.5%). The fund is also very concentrated in its largest holdings, with 46% of the fund in the top 10 holdings.

    To me, this is what makes QQQQ so appealing: I'd rather have a tech-heavy broad index fund then one with heavy weights in other sectors. Tech is the last thing the U.S. actually still produces. The next largest sector in the QQQQ, Healthcare (15.5%), made this fund even more appealing in the uncertain market environment we've been in due to its status as a traditionally highly recession-proof industry.

    And I like the fact that Apple is given more than twice the weight of Microsoft. If things were reversed, I wouldn't go near this fund. Microsoft's stock is fine in small doses (I've profited off of it in the past) but Apple's nearly unlimited growth potential makes it a much more appealing top holding.

    Disclosure: Seeking Alpha has very strict rules governing employees buying and selling individual equities - another reason the QQQQ makes sense for me. It gives me all the Apple exposure I want with additional great companies like Cisco, Intel, Google and Teva. I have owned the QQQQ since mid-2007 but upped my position considerably in January and February of 2009.
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