The Nasdaq-100 Index (NDX) is one of the most widely followed equity benchmarks and it's easy to understand why advisors and clients alike embrace funds tracking this index.
NDX is in the early stages of its fifth decade – it debuted in 1985 – and it's made a habit of topping rival benchmarks, such as the S&P 500 and the Russell 1000 Index. That doesn't happen every year, but over long holding periods, NDX often tops its competitors by significant margins – enough to make the related tracking funds desirable core assets for client portfolios. NDX beat the S&P 500 in 11 of the past 13 years.
“The Nasdaq-100® is one of the world’s preeminent large-cap growth indexes. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization,” according to Nasdaq.
Success like that leads to offshoot indexes. For example, there's an equal-weight equivalent of NDX, a tech-only Nasdaq-100 and more. There's also the Nasdaq-100 Dorsey Wright Momentum Index.
Accessing NDX Momentum
Plenty of advisors are already familiar with Dorsey Wright's storied relative strength methodology. It serves as the backstop for an array of advisor-accessible model portfolios and exchange traded funds, among other products.
The aforementioned Nasdaq-100 Dorsey Wright Momentum Index, which focuses on the NDX components with the best potential to outperform, is accessible via the ProShares Nasdaq-100 Dorsey Wright Momentum ETF (QQQA). That ETF is home to the 21 NDX members Dorsey Wright deems to have the most attractive momentum traits, so clients get a smaller, more concentrated view of NDX, but one with potentially compelling return characteristics.
“Momentum, as an investing factor, is the tendency of stocks that have been outperforming to continue outperforming. Years of research by academics and investors alike support the strategy’s merit,” according to ProShares research. “The French Momentum Factor is a well-known data set and is widely used as a benchmark for momentum. The factor has displayed persistent outperformance throughout the previous several decades relative to the S&P 500 and Russell 1000 Index.”
How QQQA sources momentum at the sector level isn't too surprising. The fund has a 42% weight to tech – obviously large, but underweight the 48.6% NDX devotes to that sector. QQQA has a 23.36% healthcare allocation, which is more than triple NDX's exposure to that sector.
The overlapping holdings between NDX and QQQA checks in at 19 and the overlap by weight is just 19%, according to ETF Research Center data, confirming clients do in fact get an alternative or complement to the standard Nasdaq-100 with the ProShares ETF.
Unlocking Big Performance Potential
As noted above, NDX has a rich history of topping the S&P 500 – the former beat the latter by more than 300% over the past two decades. That's music to clients' ears. Obviously, QQQA is a new ETF and it remains to be seen if it's up to that standard, but it has methodology on its side.
“What Dorsey Wright discovered from this analysis was that the top quintile (the top 20 ranked stocks with the most momentum) outperformed the Nasdaq-100 Total Return Index by a large margin—13.18% per year versus 6.91% per year—over the test period (12/31/99–3/31/21). Such significant outperformance clearly indicates the potential of applying a momentum strategy to the already strong historical outperformance of the Nasdaq-100 Index,” adds ProShares.
For clients looking to overweight tech and for those patient enough to let the growth factor run for the long haul while diminish single stock risk – the ProShares fund is equally weighted – QQQA is an idea worth exploring.