The PowerShares QQQ ETF: 3 Reasons to Sell

By Markets Fool.com


The PowerShares QQQ ETF is full of elephant-sized companies. Photo: Flickr user YoTuT.

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If you're interested in the stock market and want to invest in it, a good way to do so is via an exchange-traded fund (ETF) that's based on a broad index. A solid one to consider is the PowerShares QQQ ETF , tracking the Nasdaq 100 index, which is made up of 100 of the biggest non-financial companies in the U.S. and abroad.

It may not be the perfect investment for you, though. Here are a few reasons you might not want to become a shareholder:

Vital industries excluded
First off, while the PowerShares QQQ ETF does instantly plunk you in a wide variety of companies -- in industries such as information technology (with 60% of assets), consumer discretionary (17%), healthcare (15%), and consumer staples (5%) -- it also excludes some industries quite vital to our economy, such as the financial sector, real estate, and energy.

You may feel like you're investing in a somewhat smaller version of the S&P 500 with the PowerShares QQQ ETF, but it's diversified across fewer industries. Those who have high expectations for the financial sector, for example, are out of luck, as are those interested in profiting from real estate. Meanwhile, the industries represented aren't exactly appearing in equal proportion. The vast majority of the fund's assets are in the technology and computing arena. That's not necessarily a bad thing, of course, but it makes the fund mostly a technology play, with a few other industries tossed in, too. If you're looking for a relatively comprehensive broad-market index fund, this isn't it.


Photo: Flickr userLuis Villa de Campo.

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Small companies excluded
There's another kind of exclusion going on, also. The average market capitalization (market size) of the fund's holdings tops $100 billion. With little to no mid-cap or small-cap presence, it's excluding parts of the economy that can grow faster than large-cap stocks. That, too, isn't inherently a bad thing, but it makes this technology-oriented fund really a large-technology-company fund. Investors in it can benefit as semiconductor giants come out with newer and faster chips, but they won't be profiting from upstart technology companies. It's worth remembering that all the big, dominant companies we know started out as small outfits, and delivered a lot of shareholder value before becoming large-caps.

Even more problematic is that the Nasdaq 100 index, on which the PowerShares QQQ ETF is based, is weighted by market capitalization. Thus, Appleand Microsoft, are its top holdings, making up close to a quarter of its value. Take a close look at the fund's recent holdings and their weightings, and you'll see that even among dozens of included companies, representation in the index is rather tiny. You might be happy it owns video game giant Activision Blizzard, but the company's weighting is just 0.33% of total assets -- versus 3.6% for Facebookand 14.3% for Apple. Thus, while the fund does instantly plunk you in about 100 sizable technology companies, it's still, to a great extent, mainly an Apple and Microsoft fund.

Little income
Finally, if you're in the market for some income from your investments, you can do much better than this ETF that recently yielded 1.3%. Even among its components, you'll find some generous payouts, such as 5% from Mattel, 3.7% from Kraft Foods, 3.2% from Staples, 2.8% from Cisco Systems, 2.5% from Microsoft, and 2.4% from Intel.

Clearly, this isn't the perfect investment for everyone, and it might not be perfect for you. It has performed well, though, outperforming the S&P 500 over the past three, five, and 10 years. If you're looking for a way to invest in lots of big technology companies at once, for example, this might be the fund for you.

The article The PowerShares QQQ ETF: 3 Reasons to Sell originally appeared on Fool.com.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, ownsshares of Activision Blizzard, Apple, Intel, and Microsoft. The Motley Fool recommends Activision Blizzard, Apple, Cisco Systems, Facebook, Intel, and Mattel and owns shares of Activision Blizzard, Apple, Facebook, Intel, Microsoft, and Staples. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.