Invesco QQQ monthly review

Overview

• For the month of July, QQQ’s NAV returned -1.61% underperforming the S&P 500 Index which returned 1.22%. The Russell 1000 Growth Index underperformed QQQ which returned -1.70% while the Russell 1000 Value Index outperformed which returned 5.11%.*
• QQQ’s underperformance vs. the S&P 500 was driven by its overweight exposure in the Technology sector. The ETF’s lack of exposure in the Financials sector also added to the underperformance.
• QQQ saw inflow of $671.94 million.
• QQQ ended the month with $283.88 billion in assets under management (AUM) and remained the 5th largest ETF in the US (based on AUM).
• For the month of July, shares traded of QQQ rose by 25.74% month-over-month along with notional value traded rising by 27.37% month-over-month.¹

Market Recap

A large rotation to Value-oriented and Small-Cap stocks caused volatility to increase during the month of July. The volatility index (VIX) a commonly used gauge for volatility in US equities, rose from 12.44 to as high as 19.36 before settling at 16.36 at the end of the month.² The rotation caused the Russell 1000 Value and Russell 2000 to outperform, posting returns of 5.11% and 10.16%, respectively. Driving this rotation was favorable inflation readings, optimism of a Federal Reserve (Fed) rate cut in September, falling interest rates and disappointing earnings announcements from Large-Cap Growth companies.

The most recent Consumer Price Index (CPI) reading was released on July 11th and was the first catalyst for many investors to shift their focus to Small-Cap and Value-oriented equities.³ Year-over-year inflation was reported at 3.0%, below the estimate and prior reading of 3.1%. Core CPI, which excludes the costs of Food and Energy, rose at a year-over-year rate of 3.3%, also below analysts’ estimates which were at 3.4%. There was a rise in the cost of Core Services, which was the largest contributor to the year-over-year reading. Increases were also seen in the cost of Energy and the cost of Food. The cost of Core Goods continued to fall and be the only detractor to year-over-year CPI.

Month-over-month CPI was not only announced below the street’s estimates but showed signs of declining prices. The number was reported at -0.1%, below the estimate of 0.1%. The cost of Energy was the primary driver of the negative reading with cost of Core Goods also falling. The cost of Core Services saw the largest increase and was followed by an increase in the cost of Food.  On the day of the announcement, July 11th, Small-Cap equities rose as the Russell 2000 returned over 3.5%. Growth-oriented companies fell as the Russell 1000 Growth declined 2.11%.

Personal Consumption Expenditures (PCE), the Federal Open Market Committee’s (FOMC) preferred measure of inflation, was released on July 26th.^4,5 Year-over-year PCE was announced at 2.5%, in line with the 2.5% expectation and lower than the previous month’s reading of 2.6%. A rise in the cost of Services continued to be the majority of the reading followed by the cost of Nondurable Goods. The cost to Nonprofits also contributed. The cost of Durable Goods was the only deflationary component to year-over-year PCE.

Month-over-month PCE came in at 0.1% and was also in line with expectations but higher than previous month’s reading which was 0.0%. A rise in the cost of Services was the only component with a positive value. This was mostly offset by declines in the cost of Non-durable Goods and Non-profits.

The cost of Durable Goods neither contributed nor detracted from the reading. Month-over-month Core PCE, which excludes the Food and Energy costs, rose 0.2% which was in line with expectations, also higher than the prior reading of 0.1%. Messaging from the FOMC after the July meeting showed that the steady year-over-year decline of PCE gave potential to a September rate cut.

The FOMC met on the last day of the month and announced that there would be no change to the target rate and that it would remain between 5.25% and 5.50%. Messaging from the statement brought balance back between the FOMC’s dual mandate which is stable inflation and employment. The change in tone implied that the officials will be paying close attention to future employment readings such as Nonfarm Payrolls. An unexpected spike in unemployment has the potential to be met with faster easing of monetary policy. However, this would also signal that the economy is weakening at a quicker pace than what the FOMC is anticipating. Moreover, the unemployment rate has risen over the past few readings. Further increase could lead some to believe the US may be entering a recession.

Immediately after the announcement equities rose but experienced a sell-off back to levels seen earlier in the day. With that being said, the S&P 500® Index finished the day, July 31st, up 1.59% while QQQ’s NAV rose 3.02%. Equities had risen prior to the FOMC announcement due to a favorable Chicago PMI reading that showed better-than-expected sentiment amongst surveyed manufacturing, construction and service firms.⁶

Coinciding with the positive inflation data and adjusted expectations of when the Fed will cut rates, interests rate continued their move down throughout the month of July. The US Treasury 10yr yield fell from 4.40% to 4.03% while the 2yr fell from 4.75% to 4.26%. A monthly move down in the yield of this size had not been seen since December. Also, prior to the FOMC meeting, Bloomberg showed that investors were anticipating the first rate cut to arrive in September with a possibility of the second arriving in December. After the close on July 31st, it was shown that most investors fully expected the second to arrive by the end of the year.

QQQ Performance

From a sector perspective, Telecommunications, Energy and Real Estate were the best performing sectors in QQQ and returned 5.69%, 5.53% and 5.23%, respectively. During the month, these three sectors had average weights of 3.97%, 0.48% and 0.20%, respectively. The bottom performing sectors in QQQ were Technology, Consumer Discretionary and Health Care with average weights of 61.09%, 17.66% and 6.12%, respectively. Technology returned -3.79%, Consumer Discretionary returned -0.45% while Health Care returned 1.66%.

Standardized performance - Performance quoted is past performance and cannot guarantee of comparable future results; current performance may be higher or lower. Visit invesco.com/performance for the most recent month-end performance. Investment returns and principal value will vary; you may have a gain or loss when you sell shares. Fund performance reflects fee waivers, absent which, performance data quoted would have been lower. Invesco QQQ’s total expense ratio is 0.20%. Index performance does not represent fund performance. Please keep in mind that high, double-digit and/or triple-digit returns are highly unusual and cannot be sustained.

QQQ’s underperformance vs. the S&P 500 was driven by its overweight exposure in the Technology sector. The ETF’s lack of exposure in the Financials sector also added to the underperformance. Underweight exposure and differentiated holdings to the Industrials sector was the third detractor from relative performance vs. the S&P 500. The Telecommunications sector contributed the most to relative performance and was driven by its overweight exposure and differentiated holdings. Differentiated holdings in the Basic Materials sector also contributed to relative performance to the S&P 500. These were the only two sector exposure in QQQ that contributed to relative performance vs. the S&P 500.

QQQ’s overweight exposure to CrowdStrike, Advanced Micro Devices and Meta Platforms were the largest detractors from relative performance vs. the S&P 500. CrowdStrike, Advanced Micro Devices and Meta Platforms had average weights during the month of 0.52%, 1.74% and 4.43%, and returned -39.47%, -10.93% and -5.53%, respectively. Overweight exposure to Tesla, Apple and Charter Communications contributed the most to relative performance vs. the S&P 500 for the month and had average weights of 2.97%, 8.84% and 0.30%, respectively. Tesla, Apple and Charter Communications returned 17.28%, 5.44% and 27.01%, respectively.

Tesla announced earnings on the 23^rd and was not received well. The Electric Vehicle maker missed on adjusted earnings-per-share (EPS) which came in at $0.52 vs. the estimate of $0.60.⁷ The miss was driven by lower-than-expected vehicles sold. It was expected that 444.12k vehicles would be sold but results showed 443.96k. Higher-than-expected operating expenses also contributed to the miss. Elon Musk announced the unveiling of Tesla’s robotaxi would be delayed from August 8^th to October 10^th, which also added to the negative tone of the announcement. Although Tesla’s stock fell over 12% the day after the announcement, it was up for the month of July by 17.28%.

Despite beating both revenue and adjusted EPS expectations, Alphabet’s stock fell after announcing financials results for its recent quarter. Adjusted EPS was reported at $1.89, $0.05 above the consensus estimate. Revenue beat the $84.4 billion estimate and came in at $84.7 billion. Alphabet saw Google Advertising and Google Cloud revenue beat expectations while YouTube Advertising revenue disappointed. The company continued to spend more to improve its artificial intelligence capabilities. Executives also mentioned they plan to further their investment into Waymo, a subsidiary focused on self-driving and autonomous vehicles. The company’s stock fell 5.03% the following trading day on July 24th.

Similar to Alphabet, Microsoft’s stock fell in afterhours trading following the announcement that they beat EPS and revenue expectations in their recent quarter’s financial results. Revenue was announced at $64.73 billion vs. the consensus estimate of $64.52 billion while adjusted EPS came in at $2.95, above the $2.94 estimate. Many investors were disappointed in Microsoft’s cloud revenue growth that came in $200 million below estimates. The lower number equated to a 0.70% miss. Within that segment, Azure saw growth of 30% from Q2 last year along with 30% growth from the previous quarter’s announcement. The software company also had higher than expected capital expenditures which also contributed bringing down the company’s overall gross margin. The company’s stock traded down by as much as 8% immediately after the announcement in afterhours trading on July 30^th. The stock paring some of the losses on the following day of trading, July 31^st.

Meta Platforms announced on the last day of trading in July and reported upbeat results. Adjusted EPS came in well above the $4.72 expectation at $5.16. Revenue also exceeded expectations and was reported at $39.1 billion. The EPS and revenue numbers represented quarter-over-quarter growth of 9.55% and 7.18%, respectively. Capital expenditures continued its growth trend and came in at $8.2 billion. Meta continued to invest into its artificial intelligence and virtual reality capabilities. The social media company also reported 3.27 billion daily active users across all their applications. The company’s stock rose over 7% immediately after the announcement.

Trading Stats

For the month of July, shares traded of QQQ rose by 25.74% month-over-month along with notional value traded rising by 27.37% month-over-month. The month saw an average of 36.44 million shares trade each day (vs. 28.98 million last month) for a value of $17.48 billion (vs. $13.72 billion last month). That compares to averages of 66.35 million shares and $6.25 billion over the life of the fund, and 44.19 million shares and $18.10 billion for past 12 months.