various ETFs based on the Nasdaq-100

May 2016
Which Nasdaq-100 ETF is Right
for You?
Dorsey Wright ETF Spotlight
Market breadth is an important technique used in
the NDX Bullish Percent as well as what this means
technical analysis, as it helps to gauge the general
for the Nasdaq-100, it is worth taking a step back and
direction of the market. One way that we track market
reviewing what these two instruments represent.
breadth at Dorsey, Wright & Associates (DWA) is through
“participation” indicators, such as the Bullish Percent,
which measures the percentage of stocks within a given
universe that are on a Point & Figure buy signal. When
more stocks are on buy signals, participation rates
across a particular universe are much wider, indicating
an expansion of market breadth. When fewer stocks are
on buy signals, it is an indication that a lower number
of stocks are participating in rallies, an indication of
absolute weakness and potentially, lower market prices.
In the end, these indicators are simply a record of what
is actually happening in the marketplace.
To briefly review, the Nasdaq-100 is a modified
capitalization weighted index that tracks the largest nonfinancial companies listed on the Nasdaq Stock Exchange.
The top 10 companies within the Index represent roughly
50% of the Index and often, but not always, may sway the
direction in which the Index trades. The Bullish Percent
chart is an oscillating indicator that gives each stock
within the Index equal representation as it measures the
percentage of stocks within a given universe that are on
Point & Figure buy signals. In other words, the Point &
Figure chart of NDX takes a cap-weighted approach to
those 100 stocks and the Bullish Percent chart takes an
Over the past couple of months, we’ve observed some
equal-weighted approach to the same 100 stocks. With
interesting developments take place on the Bullish
all of this in mind, we wanted to take some time and
Percent chart for the Nasdaq-100 (NDX) Index. We saw
review the multitude of products on the market that track
it rise up to its 2015 high of 78%, indicating that 78% of
components of the NDX and the differences in how the
the Nasdaq-100 were on buy signals, and then ebb back
products track the Index. As mentioned above, the chart
down to the 52% level, indicating that over half of the
of the NDX has returned to a near-term buy signal after
Nasdaq-100 are on buy signals. While this indicator has
falling into oversold territory. Additionally, many of the
ebbed and flowed in recent months, it is still well above
products that track the components of the Index are in
its January 2016 low of 20%. The overall increase in
oversold territory and may be worth watching to see
buy signals has been a bullish sign for this particular
if any of them may offer opportunity if they rally from
segment of the market, as participation rates, ie: market
these oversold levels. With that in mind, let’s take a look
breadth, has increased. To elaborate on the significance
at some of the ETFs that track the Nasdaq-100 Index.
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NASDAQ-100 INDEX /
Cap-Weight vs Equal Weight
The first ETF to begin tracking the Nasdaq-100 Index did so
weight them by means of market capitalization. Instead, the
in March 1999, and in a rather conventional fashion, as it
Index is equally-weighted at each rebalance date, bringing
mirrors the “modified cap-weight” Index in the form of what
each component of the Index to a weighting of roughly 1%. In
is now the PowerShares QQQ ETF. The “Q’s” currently have
April 2006, First Trust launched the First Trust Nasdaq-100
more than $37 billion in AUM and will naturally behave very
Equal Weighted Index Fund (QQEW), which tracks this
much like the largest components of the Index, as the top 10
version of the Nasdaq-100. The “Q’s” are essentially the
stocks comprise over 50% of the Index (leaving the other 50%
House of Representatives of the Nasdaq-100, treating Apple
to the bottom 90 stocks), and the top two holdings (Apple
Computer (AAPL) in much the way that the state of California
and Microsoft) make up 20% of the Index.
has an outsized voting contingent within congress. QQEW is
instead analogous to the U.S. Senate, where each state (read:
The “Equal-Weighted” Nasdaq 100 Index (NDXE) tracks those
stock) has an equal number of votes.
same largest 106 non-financial stocks today, but does not
INTERMEDIATE-TERM SCALE TREND CHART
2
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INTERMEDIATE-TERM SCALE TREND CHART
First Trust NASDAQ-100 Equal
PowerShares QQQ Trust (QQQ)
Weighted Index Fund (QQEW)
As it stands today, the weight of the evidence is still positive for both ETFs as they maintain fund scores north of 3 (DWA Fund
Scores range from 0.00 to 6.00 – the higher the score, the “stronger the fund.”) When we take a look at the intermediate-term
scale charts of both QQQ and QQEW, we see they both pulled back to test the August 2015 correction lows after rallying during
October 2015. Both QQQ and QQEW fell to violate their correction lows in February, however, both have rallied considerably
off those recent lows. The recent action on both trend charts confirms what we have seen transpire in the market recently
in that some of the largest stocks on the market have fared slightly better than the somewhat smaller counterparts. To gain
further perspective on the relationship, we look to the relative strength chart that compares QQQ vs QQEW. A relative strength
comparison of QQQ vs QQEW must be conducted on a highly sensitive scale (we use 1.0% below) as these two funds are highly
correlated due to owning the same securities. Today, that relationship favors the cap-weighted Q’s, as they have maintained
an RS Buy Signal versus QQEW since August 2011. The performance dispersion over the past 4 1/2 years has often been very
subtle but it has widened more recently, with shares of QQQ returning +94.06% and QQEW gaining+ 77.81% from 8/02/11
through 3/31/16. Both have outpaced the S&P 500 Index (SPX) over that time, which is up roughly +64.25%.
Relateive Strength Chart (1.0%)
QQQ vs. QQEW
The relative strength signal favors QQQ as it has maintained a Buy Signal versus QQEW since August of 2011.
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3
Tech vs Ex-Tech
In 2006-2007, First Trust added a pair of products to their
headcount of “ex-Technology” constituents. The First Trust
ETF lineup that allowed investors to delineate Nasdaq-100
Nasdaq-100 Technology Sector Fund (QTEC) launched in
exposure along sector categories, specifically Tech versus
April 2006 with the mandate of tracking an equal-weighted
ex-Tech. The viability of these products, which total over
basket of Nasdaq-100 components considered to fall within
$400 million in assets between the two today, speaks to the
the broad Technology sector. Today, this fund invests in
growth that the Nasdaq-100 has continued to experience
36 such securities across the Semiconductor, Software,
through tertiary products even as it reaches the ripe old
Internet, Computer Hardware, Computer Services, and
age of 31. The Nasdaq-100 inventory has evolved from the
Telecom sub-sectors. Meanwhile, the First Trust Nasdaq-100
late-90s, at which point it truly was a “Technology” index,
ex-Technology Sector Index Fund (QQXT) invests in all the
to its current composition today, which includes a greater
“other” Nasdaq-100 companies, holding those in equalweighted fashion as well.
INTERMEDIATE-TERM SCALE TREND CHART
First Trust Nasdaq-100 Technology Sector Index Fund (QTEC)
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Both the “Tech” and “ex-Tech” products from First Trust that track Nasdaq-100 sub-indexes offer positive long-term trends (see
charts above), with the Tech fund QTEC currently offering a stronger fund score at 3.50. The relative strength chart between the
two favors the QTEC as well. QTEC generated an RS buy signal versus QQXT in June 2014 and remains on a buy signal to this
day. The comparison below is plotted on a 2% scale, which is less sensitive than the earlier RS chart (QQQ vs QQEW) as these two
funds do not have any common holdings.
Relateive Strength Chart (2.0%)
QTEC vs. QQXT
The relative strength signal favors QTEC as it has maintained a Buy Signal versus QQXT since June of 2014.
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5
Alternative Nasdaq-based ETFs
The Fidelity Nasdaq Composite Index ETF (ONEQ) launched in
PowerShares and Nasdaq to enhance the PowerShares DWA
2003 as a broader alternative to the Q’s, including exposure
Nasdaq Momentum Portfolio (DWAQ) to track a relative
to the entire Nasdaq Composite Index of approximately
strength driven strategy. Like the two aforementioned
2,000 securities. It is a capitalization-weighted fund, and
funds, DWAQ is not bound by strictly the Nasdaq-100,
so much of its exposure is dedicated to the Nasdaq-100
but rather uses a starting inventory of roughly 1,000
components. In August 2012, the First Trust Nasdaq
Nasdaq-listed companies. From there, we employ relative
Technology Dividend Index Fund (TDIV) began trading, which
strength to reconstitute the portfolio of 100 stocks each
uses a dividend value weighting methodology as well as a
quarter. Nasdaq-100 components must earn their way into
rising dividend screen to construct its portfolio. This fund
the portfolio with superior performance trends relative
does use an inventory beyond that of only Nasdaq-listed
to other Nasdaq listings, and the current composition
securities however. In February 2014, DWA partnered with
of DWAQ includes 27 such Nasdaq-100 components.
INTERMEDIATE-TERM SCALE TREND CHART
INDEX METHODOLOGY
PowerShares DWA NASDAQ Momentum Portfolio (DWAQ)
Dorsey Wright Nasdaq Technical
Leaders Index TLNadaq
Starting Inventory:
Nasdaq-listed securities
Eligibility:
1,000 common stock with largest market
capitalization
Ranking:
All securities are ranked based upon
relative strength against a common
benchmark and each other
Stock Selection:
The Top 100 securities by relative strength
ranking are selected
Index Weighting:
Securities are weighted by their relative
strength score, higher scores receive large
weights
Maintenance:
Dorsey Wright Nasdaq Technical Leaders
Index rebalanced and reconstituted on
quarterly basis
Index Inception: April 21, 2011
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DWAQ currently has 19 holdings (out of 100) from the Nasdaq-100,
with the remaining 81 being other high RS stocks listed on Nasdaq.
SUMMARY /
DISCLAIMER /
The purpose in discussing the different products on the
This report is for Internal Use Only and not for distribution to
market that seek to track the NDX is to show that ETFs
the public. While we make every effort to be free of errors in
give investors the ability to invest in many of the same
this report, it contains data obtained from other sources. We
stocks but take different approaches when investing within
believe these sources to be reliable, but we cannot guarantee
those stocks. NDX is not the only index that has a number
their accuracy. Investors who use options should read the
of products on the market that approaches investing in the
Options Disclosure Document before making any particular
Index in different fashions. With this recent turbulent market,
investment decision. Officers or employees of this firm may
it is worth taking time to assess what the different products
now or in the future have a position in the stocks mentioned
are that follow an index that your client may be looking
in this report. Dorsey, Wright is a Registered Investment
for exposure to. Not only do these ETFs give your clients a
Advisor with the U.S. Securities & Exchange Commission.
myriad of ways to invest in certain segments of the market,
Copies of Form ADV Part II are available upon request.
but they also are useful in gaining perspective on the market
or segment that you may be watching. With the Domestic
Equity prices provided by Thomson-Reuters. Cross Rate
Equity markets potentially showing the first signs of positive
prices provided by Tenfore Systems. Option prices provided
action from oversold territory recently, it is worth taking the
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time to look at the different products that may track an index
Associates, LLC.®
you are looking to gain exposure to. One of them may be
just what you are looking for and could be good additions to
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The ability to get more granular and focus on where
we may want to gain exposure to an index is part of
the innovation that ETFs provide to the marketplace.
results may differ materially from those expressed or
implied. Past performance is not indicative of future results.
Investors should undertake their own due diligence and
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