Themes such as artificial intelligence (AI) have a way of captivating technology investors, so it's understandable the sector stokes wonder and raises questions about what's next. Time will tell what the answers are, but tech's next big thing could already be in its nascent stages, and it might just be quantum computing.
To many investors, what makes quantum computing alluring is that it significantly enhances traditional computing power. Old guard computing power is measured in bits. Quantum computing ratchets that up to qubits. Not only that, but this evolving technology also intersects with other disruptive themes, including AI and cloud computing, underscoring its potential for a wide range of use cases.
Combine those factors, and it's no surprise that some market participants have stars in their eyes regarding this industry; however, this is a tricky space in which to make stock picks. That's why I've got my eyes on the Defiance Quantum ETF (QTUM +0.14%).
An easier path to quantum computing investing
Using an exchange-traded fund (ETF) such as the Defiance fund to invest in quantum computing is a smart move for investors of all skill levels, as this industry is a minefield for stock pickers. Indeed, some of the more familiar quantum names, including D-Wave Quantum and Rigetti Computing, both of which are constituents of this ETF, have generated jaw-dropping returns. However, there's another side to the quantum investing coin.
This ETF could be the way for investors to reduce risk in the quantum computing space. Image source: Getty Images.
Some of the story stocks in the group have attained that status largely due to investor enthusiasm. It's not unheard of for quantum computing companies to have no products, meaning they have no sales and thus are burning cash. Amplifying that ominous scenario are expectations that it could be years before those negatives turn into positives.
Those issues highlight the utility offered by the Defiance ETF. Not only does the fund eliminate the stock-picking burden, but it balances out some of the volatility associated with this niche by providing exposure to mature tech leaders such as Advanced Micro Devices and Nvidia, among others.
Yes, the Defiance ETF still has ample exposure to potential millionaire-maker stocks, but I'd argue if it was % "quantum pure," it'd subject investors to an unnecessarily bumpy ride. It's hard to argue with the quantum fund's results. The $3.19 billion ETF, which turned seven years old in September, returned more than 387% since inception.
NASDAQ: QTUM
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Another reason I'm watching this quantum ETF
There's more to the balance story with the Defiance fund, and that perk is another reason I'm keeping tabs on the ETF. Many traditional sector funds weight components by market capitalization, and in tech, that leads to outsized exposure to Nvidia, Microsoft, and a small number of other stocks.
That's great when the big names in those funds are trending higher, but if just one or two stumbles, a cap-weighted fund is going to drop. That's how the cookie crumbles. For its part, the quantum ETF equally weights its nearly 80 holdings, and none of those stocks command an allocation of more than 2.84%.
Figure it this way: Would you want your quantum computing fund to be 15% allocated to a stock when the investment community decides it's had enough of hope and demands results the company can't produce? Probably not. By not sporting a concentrated portfolio, the Defiance ETF mitigates some (not all) of the risk associated with investing in this arena. That point shouldn't be diminished, and it's enough for me to keep close watch on this ETF.