To The Moon

Exchange-traded fund investors are skeptical of this year’s tech rally. A net $1.4 billion has come out of tech stock ETFs this year, even as the S&P Information Technology Sector Index has soared by 35%. 

Even the popular Invesco QQQ Trust (QQQ), which is often considered a tech proxy, has registered net outflows of $538 million, despite a 33% increase in the fund’s share price.  

One ETF, however, is bucking the trend. 

The Invesco Nasdaq 100 ETF (QQQM) has pulled in $4.3 billion of new money so far in 2023, more than all but a dozen other ETFs.  

The inflows, along with price gains, have led to a more than doubling in QQQM’s assets under management since the start of the year, from $5.7 billion to $12.3 billion. 

The ETF’s ascent into the 11-figure club is even more impressive when you consider the fact that it’s less than three years old. QQQM launched in October 2020, more than two decades after the original QQQ’s launch. 

Familiar Playbook 

Like the original QQQ, QQQM tracks the Nasdaq-100, making it a clone of its predecessor. But the newer ETF has a lower expense ratio—0.15% versus 0.2%—making it more attractive for long-term investors. 

By creating QQQM, Invesco followed a similar playbook as other ETF issuers who launched cheaper copycats of their own funds to stave off competition without lowering the expense ratio of their cash cows. 

The most notable example is the iShares Core MSCI Emerging Markets ETF (IEMG), which launched almost a decade after the iShares MSCI Emerging Markets ETF (EEM). Today, the newer fund has nearly triple the assets of the original. 

Could something similar happen with QQQM and QQQ? The pair is certainly on the same trajectory.  

One caveat is that the expense ratio differential between IEMG and EEM is much greater than that of QQQM and QQQ. 

Today, EEM charges 0.68% versus 0.09% for IEMG, a difference of 59 basis points. Even when IEMG launched, the difference was close to 50 basis points. 

Similarly, the SPDR Gold MiniShares Trust (GLDM), which has seen success as a copycat of the SPDR Gold Trust (GLD), has an expense ratio that’s a quarter of GLD’s 0.4%.  

In contrast, the gap between the expense ratios for QQQ and QQQM is only 5 basis points, and would likely only expand to 10 or 15 basis points even if the latter’s expense ratio dropped significantly.  

Short Term vs Long Term  

In theory, a narrower expense ratio gap gives investors less motivation to invest in QQQM over its older cousin, which has more name recognition, greater levels of liquidity and a much deeper options market. 

But the strong inflows in QQQM this year suggest that even a 5 basis point price reduction is attractive to many investors. After all, the liquidity and options advantages of QQQ appeal to only a small subset of long-term investors. For everyone else, QQQM works just as well with a lower price tag. 

On the other hand, short-term traders will almost certainly continue to prefer the original. QQQ is routinely among the most widely traded securities in the world.  

$Invesco QQQ Trust(QQQ)$ $Invesco NASDAQ 100 ETF(QQQM)$

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