3 Reasons the PowerShares QQQ ETF Could Rise

See if you find the PowerShares QQQ ETF worthy of your portfolio.

Aug 22, 2014 at 7:15PM

Source: Yuya Sekiguchi via Flickr.

If you don't have the time or expertise to carefully select individual stocks to invest in, you'd do well to look at exchange-traded funds (ETFs) instead. They're built like mutual funds but trade like stocks, and many charge lower fees than mutual funds. That's especially true of ETFs that track indexes, and a great one to consider for your portfolio is the PowerShares QQQ ETF (NASDAQ:QQQ). There's no way to know for sure how this ETF will fare over time, but it has a lot to recommend it.

Nuts and bolts

The PowerShares QQQ ETF tracks the Nasdaq 100 Index, which is made up of 100 of the biggest stocks in the Nasdaq Stock Market based on market capitalization. It includes U.S. and international companies but excludes the financial industry and a few others. It's technology-heavy, featuring industries such as telecommunications, retail, biotechnology, and computer hardware and software. Compared to many other major technology-focused ETFs, such as the iShares US Technology ETF (NYSEMKT: IYW), this one is bigger, charges less in fees, and has a more impressive performance record. Its expense ratio, or annual fee, is a very low 0.2%, comparing favorably with many peers. It doesn't offer much of a dividend, as many of its holdings don't pay them.

Let's review some reasons why this ETF could help plump up your portfolio.

Influential holdings

For starters, while some indexes weight components equally or by a particular factor such as revenue, the Nasdaq 100 Index is weighted by market capitalization. In such indexes, companies with sizable market caps will have an outsize influence. Indeed, the Nasdaq 100's biggest three constituents -- Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Google (NASDAQ: GOOG) (NASDAQ: GOOGL) -- make up close to a third of the index's total value, with weightings of 13%, 8%, and 8%, respectively. Each has a market cap above $300 billion, with Apple's topping $600 billion.

Thus if you have strong faith in this ETF's top holdings, you can expect it to be turbocharged by their performance. There's a lot to like about these holdings, too. Apple's last quarter featured revenue rising 6% (not too shabby for a behemoth) and earnings per share jumping 20%, reflecting growing profit margins. It's expected to debut many promising offerings in the coming year or so, such as the iPhone 6, a smartwatch, a device to help manage a home, and perhaps a larger-screen iPad. Microsoft is preparing its new Windows 9 operating system and has posted solid growth in commercial enterprises and Office 365 subscriptions. New CEO Satya Nadella is promoting a "One Microsoft" strategy, which will make the OS experience uniform across computers, tablets, and smartphones. It offers a 2.7% dividend yield, and the company has hiked its payout aggressively over the past years. Google, meanwhile, can brag about its Chrome browser, which just surpassed Microsoft's Internet Explorer, as well as its widely embraced Android platform. Its last quarter featured a 22% rise in revenue, a 25% increase in aggregated paid clicks (a key revenue element), and falling costs per click and traffic acquisition costs.

Promising industries

Then there are the sectors in which this ETF is invested, such as technology and health care. These are industries experiencing rapid growth that's expected to continue. For example, the International Data Corporation estimates that the global Internet of Things market will grow from nearly $2 trillion in 2013 to more than $7 trillion by 2020. Meanwhile, market research firm Evaluate has projected that sales of prescription drugs will grow by an annual average of 5% globally between 2013 and 2020, reaching $1.1 trillion. That's a lot of growth potential.

Fewer worrisome industries

On the flip side, the ETF doesn't invest in companies in the financial, energy, utilities, or real-estate industries -- and to some investors, that makes it more attractive. Consider, for example, that the financial industry is still digging out from the credit crisis of a few years ago, with many banks still carrying troubled loans and facing fines for misconduct. Bank of America (NYSE: BAC), for example, just got whacked with a massive $16.7 billion fine. The existence of the Consumer Financial Protection Bureau is also not auspicious for the industry.

And if you worry about how reliably the energy industry will grow, you'll be pleased to find no energy companies in this ETF. The same goes if you're dubious about the real-estate market's near-term promise because the housing recovery is taking its time and first-time homeowners aren't busting down the doors. Even once-trusty utilities are dealing with more uncertainty, facing new regulations such as a proposed reduction in carbon output that would be costly for them to comply with.

All of these factors together paint a rosy picture of the PowerShares QQQ ETF's prospects.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of Amazon.com, Apple, Costco Wholesale, Google (C shares), and Microsoft. The Motley Fool recommends Amazon.com, Apple, Bank of America, Costco Wholesale, Google (A shares), Google (C shares), and Whole Foods Market. The Motley Fool owns shares of Amazon.com, Apple, Bank of America, Costco Wholesale, Google (A shares), Google (C shares), Microsoft, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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