Invesco QQQ monthly review

Overview

• For the month of December, QQQ’s NAV returned 0.44% outperforming the S&P 500 Index which returned -2.38%. The Russell 1000 Growth Index outperformed QQQ which returned 0.88% while the Russell 1000 Value Index underperformed which returned -6.84%.
• QQQ’s outperformance vs. the S&P 500 was driven by its differentiated holdings and overweight exposure in the Technology sector. Differentiated holdings and overweight exposure to the Consumer Discretionary sector was the second largest contributor to relative performance.
• QQQ saw inflow of $889.17 million.
• QQQ ended the month with $318.80 billion in AUM and remained the 5th largest ETF in the US (based on AUM).
• For the month of December, shares traded of QQQ rose by 5.26% month-over-month along with notional value traded rising by 9.10% month-over-month.¹

Market Recap

Positive momentum seen in equities post-election slowed in the first half of December before eventually reversing, as sellers took control during the back half of the month. The selling pressure seen during the last two weeks of the year caused major US indices to finish at levels not seen in the middle of November. Large-growth oriented companies outperformed which helped QQQ and the Russell 1000 Growth® Index outperform the S&P 500® Index. Small-cap oriented companies, along with Value oriented companies, underperformed as the Russell 1000 Value and Russell 2000 falling 6.84% and 8.26, respectively. Overall, price action during the month showed many investors focus on what had been favored through most of the year: the Magnificent 7.²

Volatility did see an uptick during the month with the VIX Index posting a high of 27.62 on December 18th.³ The monthly high occurred on the day of the Federal Open Market Committee’s (FOMC) last meeting of the year.⁴ The VIX ultimately finished at 17.35. The FOMC meeting was the primary catalyst of equity markets in December, but investors did pay close attention to interest rates and inflation readings.

The FOMC concluded their final meeting of 2024 on December 18th and provided insight into the potential future path of interest rates. The decision to cut the target rate by 0.25% brought the target range to 4.25% - 4.50% and was highly anticipated by many investors. However, other information that was released with the decision gave many investors the view that it was a “hawkish cut.” Driving this train of thought was the updated Summary of Economic Projections (SEP).⁵ The SEP is released on a quarterly basis and provides the FOMC’s projections for Gross Domestic Product (GDP), inflation, unemployment and the Fed Funds target rate.⁶

When compared to the previous SEP, the median projection for the 2025 target rate moved up from 3.375% to 4.375%. This suggested that there could potentially be less rate cuts in 2025. Moreover, this median estimate fell within the current range of the target rate implying that there may be no rate cuts in 2025, a more hawkish estimate than before.

During the press conference immediately following the meeting, Federal Reserve Chairman Jerome Powell continued his balanced messaging stating that while inflation remained above their long-term goal of 2%, progress was being made to achieve it while the labor market still showed strength. In response to a question, Powell stated that while he did not have any opinions on future tariffs that may be enacted by President-elect Donald Trump, analysis of the 2018 tariffs would be a good place to start when thinking about the effects of potential tariffs in the future.

Powell reiterated that the committee would continue to remain data dependent when making future policy decisions and would not comment on when the next rate cut may be. However, the adjustment to the median target rate expectation for 2025, as shown by the SEP, was enough to send the VIX to 27 and cause the S&P 500 to drop 2.95% that day on Wednesday, December the 18^th.

Interest rates continued their move higher with the 10yr US Treasury’s yield reaching as high as 4.63% at one point. This reading was close to 2024’s high reading of 4.70%. The 2yr US Treasury’s yield also rose but finished the month relatively flat at 4.24%. The relatively flat move in the 2yr yield, combined with the continued rise of the 10yr yield, led to the continued steepening of the yield curve, with the spread finishing December at 0.33%, the highest reading since June of 2022.^7,8 While the steepening of the yield curve has been anticipated due to the FOMC rate cuts, the path taken by interest rates, ultimately being higher, was a key contributor to the underperformance of Small-cap companies when compared to Large-cap.

The FOMC’s preferred inflation measure, US Personal Consumption Expenditures (PCE), was reported two days after the FOMC’s meeting concluded.⁹ Year-over-year PCE came in at 2.4%, below the estimate of 2.5% but higher than the previous of 2.3%. A rise in the cost of Services accounted for most of the reading. Costs to Durable Goods and Nondurable Goods fell. Month-over-month PCE rose at a rate of 0.1% lower than the estimate and previous reading of 0.2%. The 0.1% equated to an annualized rate of 1.2%, lower than the FOMC’s target, and gave some investors confidence which contributed to the S&P 500 rising 1.09% on December 20^th, the day of the announcement.

Performance

From a sector perspective, Technology and Consumer Discretionary were the best performing sectors in QQQ and the only ones to have positive performance for the month. The two sectors returned 2.43% and 2.71%, respectively. Consumer Staples had the third best performance and returned and -5.23%. During the month, these three sectors had average weights of 58.96%, 20.66% and 2.86%, respectively. The bottom performing sectors in QQQ were Real Estate, Basic Materials and Utilities which had average weights of 0.19%, 1.55% and 1.23%, respectively. Real Estate returned -11.99%, Basic Materials returned -9.81% while Utilities returned -8.93%.

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 outperformance vs. the S&P 500 was driven by its differentiated holdings and overweight exposure in the Technology sector. Differentiated holdings and overweight exposure to the Consumer Discretionary sector was the second largest contributor to relative performance. The ETF’s lack of exposure to the Financials sector also contributed to relative performance.

Differentiated holdings and overweight exposure in the Telecommunications sector was the only detractor from relative performance vs. the S&P 500. The Basic Materials sector did not detract or contribute to relative performance.

QQQ’s overweight exposure to Broadcom, Tesla, and Meta Platforms were the largest contributors to relative performance vs. the S&P 500. Broadcom, Tesla, and Meta Platforms had average weights during the month of 5.26%, 4.47% and 4.55%, and returned 43.40%, 17.00% and 2.03%, respectively. Overweight exposure to T-Mobile US, Adobe and Palantir Technologies detracted the most from relative performance vs. the S&P 500 for the month and had average weights of 1.65%, 1.32% and 0.30%, respectively. T-Mobile US, Adobe and Palantir Technologies returned -10.61%, -13.81% and -6.27%, respectively.

QQQ and its underlying index, the Nasdaq-100, went through their annual reconstitutions after the close on Friday, December 20^th. The reconstitution became effective on Monday, December 23^rd prior to the open. The number of constituents that entered and left were three on each side. New entrants included Palantir Technologies, MicroStrategy and Axon Enterprise while Super Micro Computer, Illumina and Moderna fell out. Out of the three new entrants, Palantir received the highest weight and finished December 23^rd with a weight of 1.09%. Much attention was given to the addition of MicroStrategy due to their stockpile of bitcoin and finished the 23^rd with a weight of 0.38%. Axon was the smallest addition and had a weight of 0.30%.

While MicroStrategy received a lot of attention for its addition into QQQ, Palantir Technologies and Axon Enterprise have become well known in their respective fields of expertise. Palantir is known as a big data analytics and software company that has utilized artificial intelligence to improve their products across their platform. They have also emerged as a leader in machine learning. Palantir recently switched its listing from the New York Stock Exchange to Nasdaq, making it eligible for inclusion into QQQ and the Nasdaq-100. Axon Enterprise is a public safety technology company that operates two primary segments: Software & Sensors and TASER. Their primary client base is law enforcement, military and individuals looking for self defense solutions. The products include software, cameras, non-lethal tasers and training content.

In conjunction with the reconstitution, a rebalance occurs which causes the weights of all existing holdings to adjust as well. The three companies that saw the largest up-weighting were Microsoft Apple and Amazon. Tesla, Meta Platforms and Broadcom saw the largest down-weighting. QQQ utilizes a modified market-cap weighted scheme which leads to the largest companies having the largest weight.

Broadcom’s strong performance for December was driven by favorable Q3 financial results that were announced on December 12^th. Revenue came in slightly below the consensus estimate of $14.08 billion at $14.05 billion while adjusted earnings-per-share was reported at $1.42 vs. $1.36. Although revenue was reported below expectations, the $14 billion figure represented year-over-year growth of 51.2% and quarter-over-quarter growth of 7.5%. The semiconductor company has become a key player in the advancement of artificial intelligence over the past 18 months by offering storage and system solutions, wired and wireless connectivity devices along with mainframe and enterprise software. The company offered revenue guidance for Q1 2025 of $14.6 billion which was welcomed positively by many investors. The company also iterated that they would continue to focus on high growth areas such as data centers and artificial intelligence. Broadcom’s stock rose over 24% on December 13^th, the day following the announcement.

Trading Stats

For the month of December, shares traded of QQQ rose by 5.26% month-over-month along with notional value traded rising by 9.10% month-over-month. The month saw an average of 29.88 million shares trade each day (vs. 28.39 million last month) for a value of $15.61 billion (vs. $14.31 billion last month). That compares to averages of 65.80 million shares and $6.41 billion over the life of the fund, and 37.11 million shares and $17.02 billion for the past 12 months.