How does a stock make it into the QQQ ETF? Here are 12 things every investor should know about the QQQ holdings.
The QQQ ETF is market-cap weighted index that tracks the performance of the Top 100 Nasdaq Index (NDX). The most popular way to invest in the Nasdaq 100 Index is through the Invesco QQQ ETF.
1. The QQQ actually holds 102 stocks.
As of January 5, 2023, there are 101 stocks in the QQQ. This is because there are a few “duplicates” due to different classes of shares and pending mergers. Google, for example, is represented twice with both their (GOOGL) Class A and (GOOG) Class C shares. Activision Blizzard (ATVI) is included as well, though the company is scheduled to merge with Microsoft (MSFT) in 2023.
2. Over 50% of the fund's weight is held within the Top 10 holdings.
Because the QQQ is a market cap weighted index, the biggest companies (by market cap) have a greater percentage of weight in the index. The table below illustrates how the Top 10 holdings currently represent over half of the QQQ.
3. Together, Apple and Microsoft stock make up over 20% of the QQQ.
This is important to keep in mind when considering the performance of the QQQ. Apple and Microsoft hold significant influence on the price of the QQQ. Any stretches of underperformance by either of these stocks would drag the price of the QQQ down as well.
4. Google holds the 3rd highest weighting.
Note that while GOOG and GOOGL are listed as the #5 and #6 holdings, when you combine them, they equal over 7% of the ETF. Collectively, this puts them above Amazon at #3 overall.
5. The bottom 10 stocks account for less than 2% of the QQQ's holdings.
Each of the names in the table below could be at risk of removal from the index when the next round of reconstitution is voted on in October 2023.
6. The Nasdaq selects (and removes) holdings from the Nasdaq-100 Index annually in December.
This process is called reconstitution. For 2023, the new stock additions and removals were announced in December 2022, with the updated holdings going into effect at the close of trading on December 19, 2022. The holdings will then be reflected in the QQQ on the next trading day.
The reconstitution process follows the following rules…
1. The top 75 ranked Issuers (Nasdaq stocks by market cap) will be selected for inclusion in the Index.
2. Any other Issuers that were already members of the Index as of the Reconstitution reference date and are ranked within the top 100 are also selected for inclusion in the Index.
3. In the event that fewer than 100 issuers pass the first two criteria, the remaining positions will first be filled, in rank order, by issuers currently in the index ranked in positions 101-125 that were ranked in the top 100 at the previous reconstitution.
7. The QQQ added 6 new stocks for 2023.
Because the annual reconstitution takes place near the end of the calendar year, the stocks selected in the December 2022 reconstitution remain in the index for the bulk of 2023. CoStar Group, Inc. (CSGP), Rivian Automotive, Inc. (RIVN), Warner Bros. Discovery, Inc. (WBD), GlobalFoundries Inc. (GFS), Baker Hughes Company (BKR), and Diamondback Energy, Inc. (FANG) are the 6 most recent additions.
8. The QQQ removed 7 stocks for 2023 to make room for new constituents.
The 6 companies removed from the Nasdaq-100 Index were VeriSign, Inc. (VRSN), Skyworks Solutions, Inc. (SWKS), Splunk Inc. (SPLK), Baidu, Inc. (BIDU), Match Group, Inc. (MTCH), DocuSign, Inc. (DOCU), and NetEase, Inc. (NTES).
9. The Nasdaq-100 Index is rebalanced quarterly in March, June, September and December.
A rebalance is different from a reconstitution because no stocks are added or removed from the index during this event. The rebalance process changes the weighting of the existing index. For example, Apple stock represents 13.5% of the weighting today, but the rebalance process could increase or decrease that number depending on changes to Apple's market cap since the last rebalance.
10. The weight of each QQQ holding can change every day.
The market cap of a stock is calculated by multiplying the price of a stock by its total number of shares. Since the price of a stock typically fluctuates during a trading day, the market cap also tends to change. Large fluctuations can impact the weighting of stock within the QQQ if the stock moves outside of the QQQ's own trading range. Invesco updates the current weight of each stock daily on their website.
11. The QQQ holds stocks from 7 of the 11 different stock market sectors.
A common misconception about the QQQ is that it only holds technology stocks. While the information technology sector currently represents almost 50% of the fund's weighting, you may be surprised to find stocks from the health care, utilities, and industrials sector. Currently, there are no stocks in the index from the following sectors: materials, real estate, utilities or energy.
12. The QQQ will NEVER have a stock from the financial sector.
The QQQ follows the Nasadaq-100 Index, which states that a “security must be classified as a Non-Financial company (any Industry other than Financials) according to the Industry Classification Benchmark.”
It will be interesting to see if this stipulation changes over time as the lines between technology and finance have become much closer. Note that Mastercard (MA) and PayPal (PYPL) are in the information technology and consumer discretionary sectors, respectively.