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Growth-Heavy ETFs Have Deflationary Goods

Since inflation is still high and previously issued transitory forecasts have clearly proved inaccurate, preparing for deflation may seem like a far-fetched concept for many investors.

While that course of action doesn’t necessarily need to be taken today, a positive for investors is that they can prepare for deflation with some familiar exchange traded funds, including the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM).

As growth-heavy ETFs with significant allocations to the technology sector, it’s easy to understand why QQQ and QQQM are enduring their share of struggles this year. More recently, however, growth stocks are showing signs of life, and some market observers argue that simply because inflation is in place today, there’s only so much companies can do when it comes to delaying or reducing spending on vital technology.

“While cyclical forces tend to deter investment in an uncertain macro environment, we believe structural changes in demographics, energy policy and security, and an aging capital base make technologies focused on cost reductions and productivity more valuable,” Morgan Stanley analyst Joshua Pokrzywinski wrote in a recent report.

Pokrzywinski noted that companies with inroads to automation and those that offer clients ways to improve efficiencies could be long-term winners. Both QQQ and QQQM are full of such firms.

“Focusing on stocks that enable this productivity and cost reduction through automation, efficiency, or their own declining cost curves while maintaining strong barriers to entry and attractive equity risk/reward, we created a Deflation Enabler shopping list,” added Pokrzywinski.

Companies with deflation-enabling properties can be found across a variety of sectors, and hallmarks include the ability of a company to offer products or services at attractive price points even as inflation or supply chain woes persist.

Stock-picking to that effect isn’t impossible, but for many investors, QQQ and QQQM could be efficient avenues to locating names with deflation-enabling credibility.

Among the Nasdaq-100 names that could be compelling when deflation arrives, Tesla (NASDAQ:TSLA) is an example of one from the mobility and logistics space. Elon Musk’s electric vehicle company accounts for 4.74% of the QQQ and QQQM rosters.

Software makers Autodesk (NASDAQ:ADSK) and Microsoft (NASDAQ:MSFT) also have deflation chops, according to Morgan Stanley. Those names combine for almost 11% of QQQ and QQQM, and Microsoft is the second-largest holding in both ETFs.

For more news, information, and strategy, visit the ETF Education Channel.

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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