Talk Your Book: The Mount Rushmore of ETFs

0:00Today's Animal Spirits Talk Your Book is brought to you by Invesco QQQQQQQQQQQQQQQQQQQ. to learn more about the NASDAQ 100 ETF, which we're going to talk about on the show today, Invesco.com. 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.

0:33Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:42Welcome to Animal Spirits with Michael and Ben. Michael, I did some research for today's show. We're talking about the QQQ, the Qs. And, you know, I asked why it was called the QQQ, and you said because NASDAQ, and didn't even realize, didn't even come to me, that the Q and NASDAQ. It's got to be, no? Yes. So, okay. So we all know it's been on such a great run, the NASDAQ 100, for the past 10, 15 years or so. Listen to this. So this fund incepted in like early 1999. So it had a ramp up when it first came out, right? For about a year, probably. Then 80 % drawdown. So from inception early 1999 through 2011, the total return for the NASDAQ 100 ETF was 14%, like 1 % annually, basically for almost a decade and a half when this fund launched.

1:27The AUM was like 30 billion in 2001. it was still$30 billion in 2012. So this ETF really took a long time to get cooking. Then since 2011, we're talking it's up 800 % or 20 % per year. But if you mash those two together, since inception, the Qs are up 9.7 % per year, basically the long-term average of the stock market. Yeah, no big deal. Right? So it seems like this 20 % per year is just an unworldly run, than it is, but that's because this fund went on an 83 % drawdown and went nowhere for well over a decade. I mean, the constituents now are not the constituents that fell 80%. Fair. The crazy thing to me is NVIDIA in 2020 was not even in the top 10 of the NASDAQ 100, right?

2:17Which is a more concentrated in it. Cause I think it's what, 50 % in the top 10, 70 % in the top 25 in this fund. Let me look now. When was NVIDIA below even like 100 billion? Let's see. Probably, I'm going to guess 2016. This is a fun game for the audience. Wait while I look at a chart. That's called professional podcasting. Oh, wow. Wow. Even in 2019, it was under 100 billion. Unbelievable. Now, granted, it went on a big, it went on a pretty steep drawdown. But still, in August of 2019, September of 2019, This thing was under$100 billion, and now it's$2.15 trillion. Not a bad run in under five years.

2:58It really has been a sea change. I feel like the NASDAQ 100, we talked about it a couple weeks ago, how it usurped the NASDAQ composite. And I think because it has 100 in the name, it's part of it. Good usage of the word. Thank you. But the whole market cap thing, the fact that it's more concentrated means that those winners are going to rise to the top, I think, faster, probably, especially since the tech space has been so, has had so much going on. Robustness? Yes. But it does feel like it's a 2020s phenomenon where the NASDAQ 100 has become a core holding in a lot of people's portfolios. You asked that on the show.

3:30That's impressive. To go from satellite to core, you could probably mention how many times it's happened on like one hand, you know? Right. It's now, it used to be Dow and S &P, and now it's Dow and S &P and NASDAQ 100, I think. That's kind of the, so. All right, now we're stepping on the material. We learned a lot. Yeah, we learned a lot about the history of this fund. It's an interesting talk. We talked to Ryan McCormick and Paul Schroeder from Invesco. So here's our talk with Ryan and Paul about the NADSAC 100. What do you prefer, the Qs or QQQ? I'm a Qs guy. Q, it sounds better. Here's our talk with them about the Qs.

4:04On today's show, we're joined by Ryan McCormick. Ryan is a factor and core equity strategist at Invesco. We're also joined by Paul Schroeder. Paul is the QQQ equity product strategist at Invesco. Gentlemen, welcome to the show. Thanks so much. Great to be here. Thank you. So over the weekend, you all celebrated your 25th anniversary. So gentlemen, congratulations on the quarter century, the great quarter century, I should say. It's great to be here. So I want to start here. The QQQ tracks the NASDAQ 100. And when people think about the NASDAQ, I wonder, they're probably thinking about the 100, even if they don't know it.

4:39Sort of the NASDAQ 100 has like taken over the NASDAQ composite, which was the big boy back in the day. Talk to us about the evolution of the NASDAQ 100. Where did it start and where are we today? Yeah. So, you know, and I think you're right. Like for a while, there's maybe like a blurring of the lines between the composite and the 100. But I think when most people are like, oh, well, what's NASDAQ doing today? Like they're referencing the 100. And it was born back in January of 1985. It was made up and continues to be made up of the 100 largest names listed on the NASDAQ exchange, X financials.

5:14So like the question always then is, well, why are there no financials? And on that same day in January of 1985, NASDAQ launched the NASDAQ Financials Index, which I think at the time was the one believed to have maybe more commercial viability. And I think it's maybe one of those things where it's better to be lucky than good, because I always say the NASDAQ 100 has kind of blossomed into this preeminent large cap growth index. And the NASDAQ financials index is one that I really only talk about when I'm making this comparison. Wait, Ryan, so the 100 was born in January 1985, did you say? What were the biggest names?

5:51I'm curious. What were the biggest names back then? Oh, in 95? I mean, in 85? I won't hold you to it. That's a long time ago. Yeah. Yeah. But so then, so then it was what early 1999 that the ETF came out then. Exactly right. Yeah. March of 1999. Okay. Explain to me the ticker. Cause I don't even know where the Q's thing came from. Cause that's part of it too. I think part of the branding is that you can just call it the Q's. What, where did that, where did it even come from? And it's, and it's, and it's, it's taken on a couple of iterations, right? It was QQQ. Then it went to the quads, four Q's and back to the triple Q's.

6:23Wait, wait, wait. I'm sorry. I'm sorry. What do you mean it was the quads? At one point there were, it was literally the QQQ. Q. Yes, there was a fourth ticker when they moved their listing over to NASDAQ. I didn't know that either. So it was traditionally kind of the four-letter tickers. So I think there's a lot of debate as to where this Q came from. What I understand is when it was launched by NASDAQ in 1999, they wanted just the single ticker Q. But that was reserved for New York Stock Exchange listed. And I think for companies that were Dow eligible. So they were kind of out of luck when it came to Q.

7:03Apparently, there was a couple of prospectuses that were printed just with the ticker symbol Q. But because at that point, they weren't allowed to have exchange-traded unit trusts with a single ticker. They just expanded it out to QQQ, which was the guidance to have a three-letter ticker. And ETS were so new back then. You didn't have as much thought recognition around the branding behind it. Now there's so much that goes into that, the branding behind it. It probably wasn't even, it was probably an afterthought, right? Totally. Totally. I mean, you know, you look at it, it's a, it's a big business trying to figure out like a catchy ticker to, to, to catch on.

7:31And I mean, back then it was, you know, I mean, these things were just getting off the ground. So I don't think you, I think you're exactly right, Ben, that there's not really the same emphasis of, you know, can I get a catchy ticker? It was like, Oh, I would love to get a single, single letter one and get it out there. But. But so the Q's like just the letter, whether it's a triple or the quad or whatever that came because Is NASDAQ ends with a Q? Is that where it came from? Or is there something more to it? That could be. I mean, I think it was Q was one of the few single letters that were eligible or weren't taken for companies that were listed on the NICI and kind of Dow eligible.

8:07All right. So tell us about the NASDAQ-Invesco relationship. Yeah. So, I mean, for us, it's a tremendous one. When we look at it specifically with QQQ, that was in 2007. Kind of that was the transfer of sponsorship. But since then, it's one of our most important partners. I mean, we're here all day at NASDAQ MarketSite. We rang the opening bell to commemorate 25 years of QQQ. I mean, it's the fifth largest ETF by assets behind a couple of S &P 500 tracker ones and a broader. I mean, it's a monster. Correct. I mean, we always say on the Mount Rushmore of ETFs, we think we should have a place. No doubt.

8:47But since then, we're over 80 ETFs that are NASDAQ index tracking. We're pushing$300 billion in assets, obviously, Q's being the largest one. But the partnership just has been a great one. And it's very important, I think, for us and NASDAQ, as we look to push the boundary of ETFs, as pretty much every ETF issuer has looked to do for the past 25 years. I mean, they're a great partner to have, and it's been just an exciting journey. Can you explain to us some of the rules behind the NASDAQ 100? I don't think a lot of people know how it's constructed. So are there any sort of hard and fast rules where we exclude these sectors or companies or market caps?

9:31How does it work? Yeah, so it is the 100 largest companies listed on the NASDAQ exchange, X financials. So it will not hold financials. It's a modified market cap weighted index. So you're looking at the largest companies getting the largest weight. And then there are some guardrails around just to protect against concentration, right? A couple of kind of two stages of weighting adjustments that they can undertake to make sure that it stays diversified. Well, that's a... Okay, I'm curious to hear you say that because 48 % of the fund is in the top 10, which has served investors incredibly well, obviously, past performance, et cetera, et cetera.

10:10But what sort of guardrails are you talking about? Well, so you can't have one name that makes up too much of the index, right? I think you can't have an issuer weight exceed 24%. Beyond that, there are rules where all the issuers with an aggregate weight of 4.5 % or more can add up to 48 % of the index. If that happens, they get rebalance down to 40%. And we saw that just this past year in July when the NASDAQ 100 underwent its special rebalance. And of course, our NASDAQ 100 tracking funds, they execute those changes as they happen real time with the NASDAQ 100. And I think kind of with that, it's to make sure that these funds or the funds that are tracking the index remain diversified.

11:01So I was looking at the history of this fund, because it goes, like I said, it goes back to early 1999. So it had a huge run right when it came out, right? And 99 ramped up, then you had the dot-com bubble. And then the assets in this fund went nowhere for well over a decade, right? Because I think it fell 80 plus percent from the highs as the Nasdaq got crushed from the dot-com bubble. And then it really wasn't, even the 2010s, there was some growth in assets, but it's really in the last, call it five years that you've seen this huge ramp up in assets. And obviously part of that is just these tech companies becoming so huge.

11:37But was there ever a worry back in the day that this fund wouldn't even really make it? Because again, the assets kind of stagnated for well over a decade. I don't think there was too much of a concern from those that I spoke to that were there at that point and kind of from the NASDAQ perspective. For them, I think it was always kind of a really important index and one that they were looking from a long-term perspective. But yeah, I mean, I think you look at the growth of assets that we've seen in the past five years, and it has been pretty staggering, right? You know, I think access to this basket of companies, I think just how it's grown in popularity from an investor recognition standpoint, it's been tremendous.

12:22I know we're talking to Invesco, not Nasdaq, but I'm just curious, like, while this is undoubtedly a tech-dominated index, there are other names that might surprise people. Costco is a large holding. Pepsi, those are both top 15 or so. You've got Starbucks in here, Mondelez, Marriott, not exactly a tech stock. What's the story of how these companies even get in here? Like, why are they listed on the NASDAQ? So I think when you look at the names that you would expect, right, there's a big pitch, like, of course, it's the first electronic exchange. So I think you look at some of those like tech oriented or, you know, names, they kind of gravitated here, right?

13:06Of course. And then, you know, from beyond that, NASDAQ has done a really good job of being kind of beyond just an index partner, right? They kind of leverage their data capabilities for, you know, a shareholder perspective. I think it's also kind of like the company that you keep. You look at like brand value of names of some of these NASDAQ 100 listed companies, and they're among the worldwide top brands across the board. So, you know, for some companies, it makes sense to be like, oh, I'm an up and coming tech company. Like, yeah, I want to be mentioned in the same breath as Apple, Amazon and the like and others that maybe are embracing the role of technology a little bit more.

13:44And again, like I said, kind of the company that you keep, you know, are interested in seeing similar brand growth. And then, you know, I think as we look to the future, right, you're seeing that line between tech and traditional sectors start to blend. We're like in 99, it was, if you had.com in your name, you're a tech company. I don't think that's certainly the case anymore, right? Everybody is leveraging technology and now it's not how efficiently you can use tech to your advantage. And I think you've seen a little bit of a blurring of the lines between names and sectors. This might be a difficult question for you to answer, But what do you think it is about the brand?

14:19You mentioned the brand name of the Qs. There are other large cap tech growth oriented ETFs that don't track one for one, but that are pretty darn close. And the Qs by far and away are the leader in terms of assets under management, in terms of volume and trading. How did they get the crown? I think there's something to be said about being first to market. And granted, there's a lot of ETFs that launched even in the early 2000s and a couple ETFs that beat QQQ to the race in the 90s. But I think having that staying power is a big part of it, name recognition. But I think that name recognition got furthered by just the marketing that goes on with QQQ.

15:06Like the NCAA. I mean, they're everywhere. Everywhere. I mean, you know, the joke is like, I challenge you to go four minutes on CNBC without seeing a Q's commercial. Right. And then, you know, beyond that, I mean, it's the NCAA before that it was there. You know, there was a Champions League golf event. There's financial literacy programs. And then just in terms of industry conferences, I mean, it's it's one where Q's, you know, has had the ability to to to go out and sponsor a lot of this this content to to, you know, ensure that it's it's front and center. So after a number of years of that, it almost becomes like second nature where you think of growth and QQQ is right there.

15:45So I think that certainly has helped. I'm curious to hear, is there like a mutual fund equivalent? Because this has done so really without any benefit from 401ks, which are predominantly dominated by mutual funds. Is it just the ETF? There are several NASDAQ 100 mutual funds in market now. We recently launched one geared towards 401ks, ticker on its IVN QX back in 2020. But it's something where prior to Invesco really taking control of the Qs back in 2007, NASDAQ did a great job of marketing and licensing the index out to several asset managers. So you do see it out there. But I think why we see the Qs really be the king in the NASDAQ 100 game is because it really is the ETF wrapper of the NASDAQ 100 and all the benefits that go along with the ETF, intraday trading, tax efficiency, etc.

16:44We could talk about the liquidity here because I think that getting so big, Michael and I have looked at this study before, you know, the biggest ETFs and how much they turn over. This has got to be one of the most liquid funds that there is, too, correct? Yes. Yeah, you are correct. It's the second most traded ETF in the world. It's not unusual for it to trade 18 to 20 billion in notional value every single day. So it's only trailing an S &P 500 ETF, which I'm sure you and your listeners could guess which one. But it's the second most traded, has the second most active derivatives market amongst all ETFs as well, as you would guess, but it's traded by many different types of investors.

17:24Paul, credit to you for not mentioning a competitor. That was very well done. Exactly. So I'm curious, when do you think this whole shift came where the NASDAQ 100 became more of a core holding? Because I have to imagine at first, you know, any sort of sector-like fund was more of a niche kind of satellite approach. And now it feels, especially, I don't know, maybe this decade in the 2020s, that it seems like it's more of a core holding for people. Do you get a sense of when that sort of changed? I can guess. You know, I would think early on in my career, like kind of around the housing market collapse in 08.

18:01I mean, I think it also coincides with where we really started to see ETF assets and even launches ramp up. I mean, I was using it back then in 2009, 2008. And I think that's where you started to see kind of attention on ETFs and certainly the assets across the overall ecosystem pick up. Now, recently, you know, we've kind of mentioned what we've seen in the past five years. I think just kind of the accessibility of the investing public has certainly helped, right? I mean, like back in 99, you weren't buying a share of Qs on your phone. Right now, you know, depending on where you're using or what brokerage you're using, you can buy a partial share of Qs on your phone.

18:44I mean, you know, something that was probably unfathomable 25 years ago. Do you have any idea what the sort of breakdown is between retail and institutional use of the fund, or is that just way too impossible to track? I think it's – I don't want to say impossible. It's supremely difficult to track, right, because, I mean, you can go through 13 Fs, but there are certainly – there are investors out there that will utilize it for their access to large growth and trade it within those filing windows. us. You have others like on the model side that I know have used Qs and have been using them for quite some time.

19:22And then of course, like the individual investor, like again, buying shares off their phone. So I think it's, I mean, it's a pretty diverse investor base. I can't give you a true number of the breakdown. I was looking at the MAG7 today, which are, correct me if I'm wrong. These are the biggest seven stocks in the Qs as well, no? Well, I have the Holdings right here. Microsoft, Apple, NVIDIA, Amazon, Facebook. Oh, wow. Broadcom jumped in there. Google's a dual share class. All right, whatever. The point is, or the question that I want to ask you guys is your opinion about what index fund flows are doing to the prices of the underlying components.

20:05We're recording this on Monday, March 11th, and I sent this to Ben and Josh. There's a significant amount of dispersion within the MAG7 today. For example, Facebook is down 5%. That's news related. Tesla's up 3%. Don't know why. Google's up 2%. Amazon's down 2%. Microsoft is down a percent. I mean, there's a significant amount of dispersion in the index today. Any general thoughts on how money coming into these things might be influencing the underlying components? do you think it's overblown do you think there's something there in between there might be something there i think at this point it's probably a little bit overblown like you know i talk about the this i talked about the special rebalance in in july right which for me was the biggest day of my year right i mean in the in the two weeks since it was announced back in july leading up to it i mean that was the busiest that i was in in all of of 2023 and i think about like you know the underlying underlying companies that were involved, right?

21:03Number one, performance kind of varied depending on the day that you looked leading up to it. And that was, I can't say that that was in their top 10, top 20, top 50 most important events of the year, right? My point just being is like, there's a lot more going on under the hood with these companies where, you know, I think a day or two or even a week of flows pales in comparison to something like an earnings report or, you know, negative news. So maybe at some point, I mean, for most of these companies, it's, you know, within queues, less than a percent of overall shares outstanding, which is not an insignificant number, but.

21:40So on the margin, I mean, I agree with you with the, with the amount of money coming in, I should say, I agree with you. These are my thoughts. With the amount of money coming in, it's hard to say that they're not doing anything. But I also, as you, as you stated, I also do think that ultimately fundamentals are what move stocks over the longterm. All the flows in the world can't keep a bad company up and vice versa. Well, it does seem like these rebalances are the things that people that can get a little wonky. Like I sent Michael one a couple weeks ago that was, there was a dividend ETF and people thought these two companies were going to be added and then they weren't.

22:12And then those companies, you know, went up or went down based on it. So that's the kind of thing. Inclusion or front-run inclusion is obviously a thing. I mean, that's not even up for debate. I mean, I think now with the speed of information, right? another, you know, being at the NASDAQ office, another competing index provider, right? Very well-known rebalance that happens. A lot of front running that went on there. I mean, although in talking to traders and some of my colleagues, like the speed of information and just the efficiency of the market makes it even now really, really hard to try to come out on the winning end of that trade.

22:47But ultimately, you know, again, like that's one event in a laundry list of them. And, And, you know, when we're talking about Qs or some of the other launched ETFs that are within the Qs family, I mean, we're positioning it as kind of a longer term core holding, right? Like this is an investing tool. And those that want to trade it, that's perfectly fine. But even those kind of like noisy events throughout a handful of days or certain days on the calendar, like ultimately we're looking for a multi-year holding period, which it shouldn't really contribute, I don't think, to the overall performance of what you're using this thing for.

23:23You mentioned that the special rebalance is one of the busiest periods in your career. Can you talk to us about what exactly that means? Is the special rebalance, is that more of a reconstitution? Or why would a market cap weighted index need to be rebalanced? Talk to us about that. So just going back to some of those guardrails that existed, one of those levels was breached. Companies that were over or issuers that were over 4.5 % of aggregate value, they added up to over 48%. So again, to maintain diversification, they needed to rebalance debt. Wait, I'm sorry. Can you unpack that? I'm not sure I follow what you said there.

24:00Yeah. So just from the index methodology document, kind of what I was referencing before, the guardrails on the NASDAQ 100 index, right? One of those levels, meaning issuers that have an aggregate weight of 4.5 % or more in the index. When you say issuer, are you talking about a company or something different? So I have to say issuer because there are two share classes of alphabet. I got it. Okay. Other times, right, like a single stock means something different than issuer. Why did they do that? Because you pull the top 10 holdings and it lists Google twice. It's so annoying, isn't it? Well, it's those damn founders.

24:33They don't want to share the voting. Put it together. I've put it in the suggestion box a number of times, and no response. So I'll let you know if something comes up. So how much are those documents that you mentioned, that those are like the index rules, how written in stone are those? If NASDAQ decided, no, we want to change those rules, how hard is that to do? I don't think it's easy, but it's definitely not without the – it's within the realm of possibility. I mean there have been some changes that have gone on in terms of kind of splitting out real estate as an eligible sector. So it is possible, right?

25:07But I think some of those guardrails that are on, that's in an effort to make sure that the funds tracking those index remain diversified. So I think those are pretty important. And I think any changes there would not be undertaken lightly. Is there a committee at the NASDAQ or at the NASDAQ 100 similar to ways of your competitors? Not in a similar vein like that, no. Is there anything funky? Like you mentioned, is this a unit trust? Are the Q's a unit trust? And if so, what exactly does that mean? What do the shareholders of this thing need to know? So we kind of referenced earlier an expansion of the Q's family.