Technology is the largest sector in the S&P 500 and a slew of other broad market indexes by a wide margin, and many of the sector’s biggest names are among the most recognizable stocks to investors of all skill levels.
On that note, it may be surprising to some market participants to learn that some of the marquee components in exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM), are currently under-owned by active fund managers.
Adding to the surprise is the point that it’s not just smaller components of the Nasdaq-100 Index (NDX) — the underlying benchmark for both QQQ and QQQM — that fund managers are currently skimping on. It’s big names, such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN). Google parent Alphabet (NASDAQ:GOOG) and Facebook parent Meta Platforms (NASDAQ:META) are also part of that group.
“The 2Q ownership data leaves us incrementally more positive on the leading tech platforms; MSFT, AAPL, AMZN, GOOG and META given these stocks continue to be underowned vs. their weighting in the S&P 500,” noted Morgan Stanley analyst Erik Woodring in a report out Tuesday.
It’s not unreasonable to assume that portfolio managers are in fact under-allocated to some big name tech stocks. After all, growth stocks slumped in the first half of 2022, and rising interest rate environments — the very scenario investors are contending with today — have historically been punitive for growth equities.
How long those money managers remain lightly allocated to previously beloved mega-cap growth fare remains to be seen, but it’s unlikely to be a permanent condition because for much of the previous bear market, the FAANG stocks and some other big NDX member firms were the primary avenues by which growth managers were able to perform in line with or outpace the broader market.
Eventually, those pros are expected to return to the stocks mentioned above, and that’s relevant to investors considering QQQ and QQQM because those stocks combine for roughly 40% of the ETFs’ rosters.
“A quant analysis on this historical data shows that on average, after adjusting for market cap and earnings beats, there is a statistically significant relationship between low active ownership relative to the S&P 500 and future stock performance,” Woodring wrote. “This indicates that on average, stocks appear to experience a technical pull higher when active ownership is much lower than the market, and vice versa.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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