(Bloomberg Businessweek) -- Invesco QQQ Trust Series 1, better known by its ticker QQQ, is one of the most storied funds in the investing universe. It's also wildly profitable—just not for its owner, Invesco Ltd.
Since its inauspicious introduction in March 1999, a year before the dot-com bubble burst, the exchange-traded fund has become almost synonymous with tech investing. Made up of the 100 or so biggest US companies listed on the Nasdaq stock exchange, it's enjoyed meteoric gains—about 430% on a total return basis over the past decade, nearly double the S&P 500—thanks to a portfolio heavy with tech juggernauts such as Apple, Microsoft, Amazon.com and more.
“There's something special about that index,” says Eric Balchunas, senior ETF analyst for Bloomberg Intelligence. “It captures the tip of the spear of American innovation. There's really nothing like it in the rest of the world.”
The success of the “Qs,” as fans like to call the fund, is staggering. The ETF has almost $200 billion in assets under management, the fifth-largest in the $7 trillion ETF universe, and it spins off close to $400 million in annual revenue from fees alone, also among the most for ETFs. The bulk of its relatively hefty annual expense ratio of 0.2% is divvied between the fund's trustee, the Bank of New York Mellon, and the provider of the underlying index, Nasdaq. Anything left over must be spent on marketing the product, in accordance with the fund's prospectus. That leaves virtually nothing for its sponsor, Invesco.
Yet the company may have finally found a way to profit from its flagship fund's popularity with a series of Q-themed offshoots. (More on that in a moment.)
To be clear, being charitable wasn't exactly Invesco's idea; after all, not earning management fees makes for a slightly awkward moment on quarterly earnings calls. QQQ is a unit investment trust, an obscure structure dating to the dawn of ETFs in the early 1990s; the other famous UIT is State Street Global Advisor Inc.'s SPY, the first ETF, which came into existence in 1993 and remains the biggest, most traded ETF. (The difference between a UIT and an open-end ETF affects asset managers more than investors; in short, the former has no board of directors and charges slightly more.) UITs are “like the appendix of the ETF world,” says Ben Johnson, head of client solutions at Morningstar Inc.—we have them even though “we're not quite sure why.”
Nor did the structure originate with Invesco. QQQ came under Invesco's stewardship in 2006, when the company acquired its owner, PowerShares, for $60 million. Nasdaq, which created QQQ as a “branding exercise,” says John Jacobs, who helped devise the product, had recently transferred ownership of the fund to PowerShares so Nasdaq wouldn't be competing with other asset management companies listed on the exchange. According to Jacobs, converting QQQ into an open-end ETF would require a shareholder vote, which would be an almost impossible and expensive undertaking given that the fund has tens of thousands of shareholders.
Enter Invesco's workaround—namely the tickers QQQM, QQQJ, QQQS, QQMG and QQJG. This family of Q-themed products, introduced over the past three years, uses the more popular ETF structure. Invesco charges a lower expense ratio for them than the original QQQ, but in this case it gets to keep the money. “We have a halo effect, because every time we market the Qs, we're marketing Invesco,” says Anna Paglia, Invesco's global head of ETFs and indexed strategies.
The most successful of the bunch is QQQM, the Invesco Nasdaq 100 ETF, which tracks the same index as QQQ but with a 0.15% fee. QQQM has already swelled to $14 billion in assets since its October 2020 release, making it Invesco's third-largest ETF. QQQJ, the Invesco NASDAQ Next Gen 100 ETF, which invests in mid-cap tech companies, has accumulated more than $700 million in assets in a little less than three years, and QQQS, the Invesco NASDAQ Future Gen 200 ETF, has just under $7 million after its introduction last October. QQMG, the Invesco ESG NASDAQ 100 ETF, and QQJG, the ESG Next Gen 100 ETF, manage $17.2 million and $3.4 million, respectively.
The intention behind QQQM wasn't to hoover assets from its older sibling, Paglia says. With its lower fee, QQQM is aimed at buy-and-hold investors, she says, whereas QQQ is beloved among professional traders and institutions for its liquidity and huge universe of equity derivatives. And as an ETF, QQQM, unlike the original QQQ, can engage in securities lending and reinvest its dividends.
The new additions are also helping Invesco diversify its ETF lineup beyond its marquee product. Invesco controls about $406 billion across its 216 ETFs, Bloomberg data show, with QQQ's $198 billion accounting for almost half. The company is “very top-heavy with their product set,” says Athanasios Psarofagis, another ETF analyst with Bloomberg Intelligence. By comparison, SPY makes up about $413 billion of the almost $1.1 trillion invested across State Street's 137 ETFs.
“I think they're doing as good of a job as anyone could from trying to diversify away from the Qs,” Jacobs says. “It's a good problem to have.”
There's one outlier, though: QQQE, an equal-weighted version of QQQ owned by Direxion with $856 million in assets. (Equal-weighted funds hold similar numbers of shares in each company; market-weighted ones base their holdings on companies' market value.) So did Invesco drop the ball? “We made an intentional decision when we decided not to launch the equal weight,” Paglia says. “QQQ is concentrated. It's a thematic investment, it's a thematic bet. When you invest in the Qs, you want the megacaps. When you do equal-weight exposure, you lose the impact.”
Family planning, in other words.
(Updates with figures for QQMG and QQJG. A previous version of the story corrected assets under management in chart.)
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