Talk Your Book: Investing in Next Gen Tech Stocks

0:00Ben Carlson:Today's Animal Spirits Talk, your book, is brought to you by Invesco. Go to Invesco.com to learn more about the Invesco NASDAQ Next Gen 100 ETF, ticker QQQJ. That's the Tech Juniors, is that right, Michael? That's right, Ben. All right. Invesco.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

0:39Ben Carlson:Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:47Michael Batnick:Welcome to Animal Spirits with Michael and Ben. There was a time there, Ben. When was it? Was it 23 when I was apologizing to the audience and to you? I guess, for, sorry, we're doing this talk again. We're doing it. We're talking about the Mag 7 because that's all there was to talk about. There was one year in particular, I do think it was 23, where the S &P was up, whatever it was, and X the Mag was basically flat or said differently. The Mag 7 was up 20 % of the 493 were flat. It was that stark. And this year, we're recording this intro on February 9th, the spread between the equal weight and the cap weighted S &P has never been this large.

1:30And I would imagine, well, I can't prove it.

1:33Michael Batnick:With a cursory glance, maybe I could, that if you were to equal weight the tech stocks versus tech, it would look similar, said differently. What about the juniors? Today, They were talking to Invesco about the junior Qs, the triple QJ.

1:50Ben Carlson:Yes. As of today, year-to-date basis, this is just price only. The next gen, which is the triple Qs with a J on the end, is up almost 6%. And the Qs themselves are just about flat on the year.

2:01Michael Batnick:So you're seeing this not only S &P and the NASDAQ.

2:04Ben Carlson:You're right. It was all like the biggest stocks are carrying all the weight. When is this other stuff going to play catch up? And now we're seeing that happen. And so we, on today's show, we talked to Paul Schroeder. Paul is the equity product strategist at Invesco, the QQQ equity product strategist. And they have all these different Qs, strategies that they talk about. So we talked about some of them today. But we really highlighted these juniors. And so you have the NASDAQ 100, which is the 100 biggest. And then this is the next 100, right? So call it mid-cap kind of growth space. And yeah, it's outperforming this year.

2:36Ben Carlson:So here's our talk with Paul.

2:40Michael Batnick:Paul, welcome back. Good to see you again.

2:42Paul Schroeder:Great to see you too.

2:43Michael Batnick:Thanks for having me on, Michael and Ben. If I'm a betting man, and I think our listeners know I am, I would bet that everybody who's listening to this knows of the NASDAQ 100. But I don't know that they are familiar with the juniors, the QQQJ, which is what we're going to be spending most of the show talking about today. Paul, who are the NASDAQ juniors? Yeah.

3:08Ben Carlson:Is that really what they're called or did you make that up, Michael?

3:10Michael Batnick:I just put up my radio voice. No, that's what they're called, no?

3:13Paul Schroeder:Well, it's the Nasdaq next gen, but a lot of people within the firm, you know, the J obviously junior. So I think you hit the nail on the head, Michael. All right, I call them juniors. All right, all right.

3:23Ben Carlson:I've always said there need to be more juniors. Like why do we reserve that just for precious metals? Junior gold miners and silver miners or should be for other stocks?

3:30Paul Schroeder:Yeah, I couldn't agree with you more. I mean, QQQJ was launched in 2020 as part of our broader innovation suite. And to the point that you just made, Ben, And I'm surprised that we didn't launch this sooner, you know, to really capture the halo effect from the cues. Michael, you're 100 % correct. You know, I talk to people from my local community, whether it's church, kids basketball team, my family. And they're like, oh, hey, I saw your QQQ commercial. Very familiar with it. You know, in, you know, very frequently in nice cases, you know, like it's made me a lot of money through the years. Right.

4:05Paul Schroeder:But to your point, not that many people have heard of QQQJ. Right. So really, we launched it back in 2020 to really extend out what QQQ really provides exposure to. So you're looking at stocks 101 through 200 non-financial companies listed on the Nasdaq Stock Exchange that are in QQQJ. It tracks the Nasdaq NextGen 100 Index. you know we've been a big partner with nasdaq through the years over 26 years through qqq and i think it just makes sense to extend that out with all the excess success we've seen from the queues through the years does that end up being more of like a mid cap index or is it still technically large cap so it falls somewhere in the middle i mean we we define it as a mid-cap growth strategy morningstar defines it as a mid-cap growth strategy So it definitely is.

5:02Paul Schroeder:But I think the way that we like to really talk about it, especially now where we are in the market, is that it does generally tend to skew bigger than your average mid-cap growth strategy. I think when you look at something like the S &P 400, that could even be argued that it's borderline small cap. We're a little bit bigger in size from a market cap perspective with NJ. And the way that I like to think about it is it could be its own standalone within the mid-cap bucket. Not that many people invest in mid-cap directly, but it's a good way to diversify against your large cap exposure.

5:39Michael Batnick:I'm looking at the holdings and the largest one is Sandisk. And to Ben's question, this is like a large company. It's$89 billion. I'm guessing that when you reconstitute, this will graduate out of the juniors.

5:54Paul Schroeder:There definitely is possibility for it. I mean, we reconstitute it on the same schedule as the queues. And the companies in the queues are strictly disqualified from being included, right? So you have zero overlap. And when they both change holdings, you generally tend to see about five to seven holdings move up from QQQJ and go into the queues, right? Every year you have things that pop up, right? What's going to be the graduates that move from J into the queues? We see about four to seven, as I mentioned. And that's definitely at the top of the list of being the potential to move in. You know, I think as we saw earlier this year with the Qs, just last month, Walmart moved in because it changes where listed over to NASDAQ and AstraZeneca dropped out.

6:40Paul Schroeder:So you get some of these off cycle additions. And if you have something like that, where Walmart obviously was never in, Jay, you might have a company like SanDisk get leapfrogged over right by a company like Walmart. But I think looking at those top holdings by market cap kind of give you an idea, assuming between now and next December, how performance is of potential additions into the Qs.

7:04Ben Carlson:There's this idea that the NASDAQ is just all technology stocks, I guess, from people who aren't aware. But this is actually a pretty diversified portfolio. Like even the top 10 holdings alone, you have Sandisk and eBay and some of the core weaves and those stocks that people know. But there's United Airlines. Ulta Beauty is one that sticks out to me because I have daughters who are really interested in the skincare these days. Same. So I have to see all the Ulta Beauty supplies around. But even just looking at the sector weightings, tech is obviously the biggest sector, but there's a healthcare component here and there's a consumer component.

7:37Ben Carlson:And so I guess this is probably more diversified than most people would assume.

7:42Paul Schroeder:You're 100 % right. So people just assume because the Qs is about 60 % tech that QQQJ is about the same. As you alluded to, the tech exposure is half of that of the Qs, around 30%, 32%. Similar, though, the top four are the same. Tech, consumer discretionary, healthcare, industrials. But I think with the type of exposures that you do see within healthcare and how fastly it has been growing within J, I think you do get a different sort of exposure within that. Even within tech, you get a different exposure within semis, within software. Software may be a dirty word over the last week, right? But within software, along with other components within the tech sector.

8:29Michael Batnick:This is a really interesting time in the market. Listen, let's be honest. The past couple of years were, I was going to say relatively boring. That's not exactly true. I mean, in fact, it's not true at all. But like the conversations that we were having, Ben, remember when it was like every week I was saying to the audience, I promise we're not going to do the mag seven this week. But in 2023, they were the only thing going up and the 493 were going sideways and it was just getting redundant. Now it was nice, right? If you're like a broadly diversified investor, like you were doing very well, obviously the stock market had a great couple of years, but it was just, getting boring and it was repetitive.

9:08Michael Batnick:And now the story is a lot different. So you see small cap stocks doing well all over the place, renewed interest in them. And you're seeing that in the juniors as well. I was surprised to see that the juniors have outperformed the majors is what I'll call the triple Qs in this context over the last year. I'm curious if the type of conversations that you all at Invesco are having with your clients are reflecting the renewed interest.

9:35Paul Schroeder:It definitely is. I mean, you have to think about our ETF lineup as well, Michael. You know, we have over 230 different tickers here in the U.S. alone, right? And the Qs obviously is a major part of that story. But, you know, we're trying to make sure that our clients' portfolios are diversified. So we've been having that conversation around diversification, concentration risk that's in the broader market, you know, within the S &P 500, you know, for the past three, past two years, really. You know, we have the largest equal weight S &P 500 fund. That's our ETF that's out there through RSP. So it's a conversation that we have been having.

10:13Paul Schroeder:And in some situations, like back in 2023, it almost felt forced, right? Because everyone was so focused on MAG7. Everyone excited about the AI revolution that was upon us. And obviously, the returns was driving a lot of that conversation. You know, what we've seen over the past 12 months is a broadening out that I think is very welcomed, at least within Invesco and I think probably other asset managers as well, but also clients, right? You know, they're speaking to the end investor on a daily basis saying, hey, you need this diversified portfolio. And a lot of the conversations are, why isn't there more Palantir in my portfolio?

10:52Paul Schroeder:Why? Yeah, why? Why don't you own Palantir? Why do you own these boring ETFs? Why do you own this value ETF? Value investing is dead, right? When secretly, you know, over the past week or so, value has been up. It has positive performance, right? So there's these rotations that happen in the market. We're always doing our best to make sure our clients know that everything is cyclical and you need to make sure you are positioned for what might happen the next day, next week. And it's made the conversations a lot easier and has opened up the conversations to something outside of a top 10 holding within QQQ.

11:31Ben Carlson:I'll set the stage here. This is the first week of February that we're recording this. And earlier this week, the big stocks were all rolling over, and RRSP, the equal weight that you mentioned, was making new all-time highs. And so you're starting to see this, and I think it's really the last, I don't know, 12 to 15 months, international stocks have done better, and small cap stocks have done better, and value stocks have done better, and quality stocks, and all these other places that you mentioned, these diversification pieces. So people who have been worried about the concentration in the market cap weighted indexes, there's plenty of easy ways to diversify now.

12:04Ben Carlson:It was just you had to force yourself to do it when it didn't feel very comfortable. Are you also seeing that in the flows these days? Are all these other funds starting to get more money because people are seeing the performance perk up a little bit?

12:15Paul Schroeder:We definitely are. I mean, to give you an idea of where we were, you know, midway through 2025, we have a momentum fund, SPMO, which is, you know, the top quartile of momentum ETFs over the past 12 months. and it went from being about a billion dollar fund to about a nine billion dollar fund right just like that because of the exposure that it had you know it's towards the the tail end though oh yeah right we started to see more flow come back into equal weight we started to see more flow come back into quality etc right so we definitely have seen it in the flow and fast forward to 2026 you know rsp has has bought in uh brought in several billions of dollars so far in net new flow off of, I think, this renewed skepticism around the hyperscalers, how much you're spending, and whether the revenue is going to be able to keep up with the spend that they have.

13:12Michael Batnick:One of the charts that I use all the time on our shows is RSPS, or actually RSPD, divided by RSPS. And that is a ratio chart of the equal weight discretionary ETF at Invesco divided by the equal weight staples ETF. And I do that because the GIC sector, and correct me if I'm mischaracterizing it, they have 40-ish, 40-odd percent, at least the last I checked, in Tesla and Amazon. So that really skews it. I mean, directionally, it's the same. But when I look at the equal weight basket, that gives me a really good indication of where the market is in terms of like a risk on, risk off type of environment.

13:59Michael Batnick:You have the equal weight for every sector. And I'm curious, like, are people allocating there? Because for the last couple of years, it was just, it was S &P 100, right? It was mega cap or get out of here. Nothing else was working. Are we seeing like more conversations? Is that like too granular? Do people care about the equal weight sector ETFs?

14:21Paul Schroeder:They do and they don't. I mean, it's obviously a very large suite that we have here, and we're the only shop in town that equal weights those sectors, right? So we do have a decent amount of AUM in them. But I think to really accurately answer that question, Michael, you have to think about the way our clients, these FAs, the way that they run their business, right? We're running into fewer and fewer FAs that run and take specific sector exposures like that and using more of... Cowards! using more models from the home office or taking more of a diversified, higher level, almost Morningstar style bucket approach.

15:02Paul Schroeder:With that being said, though, there are a few things you have to keep in mind with the Equal Aid sectors. Not only do you need to get your sector right, but you also have to assume that there's going to be broad participation within that sector. right so when when you do have some of the smaller companies really ripping uh within discretionary right outside of tesla right then equal weight is definitely the way to go and i think in general discretionary uh is a great example of it when you have such a high concentration very few names it really does make sense to equal weight perhaps all the time if you are taking that sort of sector

15:38Ben Carlson:exposure one of the areas that we've talked that is really seems to be on investors radars the last two to three years is anything with options. And I know you guys have in your suite some NASDAQ products that use options as well. Are you still seeing a lot of fanfare there from investors who really love to see that high income?

15:57Paul Schroeder:Oh, we definitely are. I mean, you just think about where demographics are right now and the way people look at retirement, right? I mean, gone are the days of defined benefit plans and here are the days of defined contribution plans where you have to generate your own income, let alone people our age, right, who may not be able to rely on Social Security. You know, when we do retire, income products are here to stay and they're going to continue to be relevant. One thing I do find interesting is that, you know, 15 years ago, you'd talk to someone who was just entering retirement and they're like, if the 10-year was just at 5%, if it was at 4.5%, I'd throw my whole portfolio in that, right?

16:40Paul Schroeder:And we've had that for the past two years. And what did we get from that? We didn't get portfolios that were 100 % treasuries. We got portfolios that augmented it with dividend income strategies, with structured note strategies, and obviously, as you alluded to, option strategies. Right. You know, it has been one of the fastest growing areas within the ETF business, not only within active ETFs in general, but option income. Right. And Invesco definitely needed and wanted to be part of that conversation. You know, we have a few different flavors of it. They are actively managed ETFs. But I think the one that's gained the most success has been QQA, which uses the Nasdaq 100 portfolio as the base, the primary portion of it.