Pure-play quantum computing stocks skyrocketed in December, driven by the announcement from Alphabet's (GOOG 0.87%) (GOOGL 0.75%) Google unit of a big breakthroughs in the field on Dec. 9. Its accomplishments would seem to have moved the nascent field of quantum computing closer to its promise of being able to solve problems that even the most powerful classical computers cannot.
Most tech experts project huge growth potential in quantum computing over the long term. The global quantum computing market for hardware and software is estimated to reach $90 billion to $170 billion by 2040, according to the Boston Consulting Group (BCG). This market was worth about $770 million to $900 million in 2023, per several sources. So, BCG's estimate equates to a compound annual growth rate (CAGR) of about 31% to 37% through 2040.
How do quantum computers work?
Here's a brief description of how quantum computers work, compliments of IBM (IBM +0.90%), widely considered the leader in the field.
While classical computers rely on binary bits (zeros and ones) to store and process data, quantum computers can encode even more data at once using quantum bits, or qubits, in superposition. A qubit can ... store either a zero or a one, but it can also be a weighted combination of zero and one at the same time. When combined, qubits in superposition can scale exponentially.
Why buy a quantum computing ETF rather than, or in addition to, a pure-play quantum computing stock?
There are likely to be some big long-term stock winners in the quantum computing space. But at this early stage, it is very difficult to identify which companies will succeed. Moreover, the pure-play quantum stocks are very risky. So, some investors might want to buy an exchange-traded fund (ETF) focused on quantum computing. ETFs are bought and sold like stocks, but their diversification makes them less risky than individual stocks.
To my knowledge, there is just one such ETF now -- Defiance Quantum (QTUM 1.97%) -- though it's likely more will be coming soon.
Data by YCharts. Since its inception, Defiance Quantum ETF has outperformed the S&P 500 and Nasdaq indexes -- and it was doing so even before quantum computing stocks surged in December.
Defiance Quantum ETF: Overview
Defiance Quantum ETF began trading in Sept. 2018 and has about $839 million in net assets, as of Jan. 3. It's an index fund that aims to track the performance of the BlueStar Quantum Computing and Machine Learning Index. (Machine learning is a type of artificial intelligence (AI), with deep learning a subset of machine learning, and generative AI a subset of deep learning.)
Defiance Quantum has 71 holdings, as of Jan. 3. The index components are assigned an equal weighting, with the weights reset semi-annually along with any necessary changes to the holdings. The ETF's expense ratio is 0.40%, which is reasonable for an ETF focused on a particular theme.
Defiance Quantum ETF: Top 10 stock holdings
|
Holding No. |
Company |
Market Cap |
Weight (% of Portfolio) |
1-Year Return |
|---|---|---|---|---|
|
1 | Rigetti Computing (RGTI +0.15%) |
$4.6 billion |
3.56% |
1,860% |
|
2 | D-Wave Quantum (QBTS 1.17%) |
$2.7 billion |
3.07% |
988% |
|
3 | IonQ (IONQ 0.80%) | $10.3 billion | 2.21% | 300% |
| 4 | Palantir Technologies | $182 billion | 1.52% |
397% |
| 5 | Teradyne | $21.3 billion | 1.50% | 28.9% |
| 8 (tie) | Alchip Technologies* | $241 billion TWD (about $7.3 billion) | 1.48% | (12.2%) |
| 8 (tie) | Onto Innovation | $8.9 billion | 1.48% | 29.8% |
| 8 (tie) | Taiwan Semiconductor Manufacturing | $1.08 trillion | 1.48% | 111% |
| 10 (tie) | Marvell Technology | $102 billion | 1.47% | 109% |
| 10 (tie) | Tower Semiconductor | $5.8 billion | 1.47% | 70.9% |
| N/A | Defiance Quantum ETF | $839 million assets under management | 100% | 60.4% |
| N/A | S&P 500 Index | N/A | N/A | 28.1% |
| N/A | Nasdaq Composite Index | N/A | N/A | 35.4% |
Data sources: Defiance Quantum ETF, Yahoo! Finance, and YCharts. *Alchip is listed on the Taiwan Stock Exchange. Data as of Jan. 3, 2025.
The top three holdings are pure-play quantum computing stocks. Palantir (No. 4) provides AI-powered data analysis platforms for government and commercial customers. Teradyne (No. 5) sells test equipment for semiconductors (chips), electronic systems, and wireless communication products, and also has an industrial automation business. Onto Innovation is a semiconductor equipment maker. Taiwan Semiconductor Manufacturing is the world's largest chip foundry, meaning it makes chips for other companies. The remaining three are chip companies.
After the top three holdings, the percentage weightings become extremely close, with many of them exactly the same. I listed the top 10 holdings so investors can get a flavor of the fund's holdings. The ETF holds nearly all the larger tech companies, including chip and cloud computing companies.
With 71 total holdings, Defiance Quantum ETF is very diversified. The greater diversification lessens the risk level of this ETF. And starting all holdings at an equal weighting and resetting them to such every six months also lowers the fund's risk level.
Big Tech quantum computing leaders: IBM and (arguably) Alphabet
IBM, which has a 1.34% weighting in the ETF, is generally considered the leader in quantum computing. It's developed several quantum chips over the last few years. Its second revision of Heron, first introduced in December 2023, is reportedly its best-performing chip. IBM's quantum computing offerings are available to users of its cloud service. Moreover, Big Blue has an open-source software platform called Qiskit that developers can use to build quantum computing applications.
Alphabet has a 1.36% weighting in the Defiance Quantum ETF. Arguably, Alphabet is the No. 2 player in quantum computing, at least among well-established big tech companies. On Dec. 9, Google Quantum AI reported that Willow, its newest quantum chip, can "reduce errors exponentially as we scale up using more qubits." This is important because a major hurdle of quantum computing is that scaling up has historically increased errors. Moreover, Willow reportedly "performed a standard benchmark computation in under five minutes that would take one of today's fastest supercomputers 10 septillion ... years." This is a number bigger than the universe is old.
NYSE: IONQ
Key Data Points
Pure-play quantum computing stocks
Defiance Quantum ETF has three pure-play quantum computing stocks, per my scan of its holdings: Rigetti Computing (No.1), D-Wave Quantum (No. 2), and IonQ (No.3). These are risky stocks because the companies generate little revenue, have large net losses, and are burning through much cash.
Data by YCharts.
That said, IonQ is arguably the least risky of the three for a couple of reasons. First, the Maryland-based company generated revenue of $37.5 million over the past year. While this is modest, it's still much more revenue than Rigetti and D-Wave took in over the last year. Its revenue has come from winning several long-term development contracts and selling some systems to customers.
Another notable thing that IonQ has going for it is that it has strategic partnerships with deep-pocketed companies Amazon and defense giant Lockheed Martin.
