QQQJ: The "Next In Line" Nasdaq 100 Stocks Are Beating The QQQ

The Invesco Nasdaq Next Gen 100 ETF has been a top 1% performer among mid-cap funds over the past decade.
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For the past few years, investors have been honed in on the Nasdaq 100 and the Invesco QQQ ETF (QQQ), the fund that tracks the index. It's easy to see why. The index has delivered a 20% average annual return over the past decade compared to a 14% return for the S&P 500.

The tech sector is no longer leading the market higher. Over the past six months, the Nasdaq 100 has performed only on par with the S&P 500.

Invesco Nasdaq Next Gen 100 ETF (QQQJ) vs. S&P 500

Invesco Nasdaq Next Gen 100 ETF (QQQJ) vs. S&P 500

That hasn't stopped investors from piling into the QQQ ETF or remaining heavily overweight to tech stocks in their portfolio. With large-cap stock valuations looking stretched, it might be time to consider looking for other growth opportunities in this market.

For investors who want to take this path, there's a new ETF that targets the Nasdaq stocks that may be next in line to join the Nasdaq 100 index at some point in the future.

The Invesco Nasdaq Next Gen 100 ETF (QQQJ) invests in the 101st to the 200th largest companies on the Nasdaq. Think of it as targeting the "bubbling under" stocks before they become the next big mega-cap names.

Invesco Nasdaq Next Gen 100 ETF (QQQJ)

Invesco Nasdaq Next Gen 100 ETF (QQQJ)

With the markets focused heavily on mega-cap tech names over the past couple years, it makes sense to rotate into smaller companies, which are comparatively cheaper and have the potential to deliver higher growth in the next few years.

Historically, the Next Gen 100 index has proven to deliver greater revenue growth and (somewhat surprisingly) higher dividend growth as well.

Invesco Nasdaq Next Gen 100 ETF (QQQJ)

Invesco Nasdaq Next Gen 100 ETF (QQQJ)

I wouldn't necessarily recommend QQQJ as a dividend growth play in your portfolio, but it does highlight how different the fund looks compared to QQQ, despite the name similarity. Whereas the Nasdaq 100 is very tech-heavy, growth-heavy and top-heavy (the FAAMG + Tesla stocks combine for 44% of the index's weight), QQQJ is much more diversified across both individual names and sectors.

Invesco Nasdaq Next Gen 100 ETF (QQQJ)

Invesco Nasdaq Next Gen 100 ETF (QQQJ)

The most notable difference is the heavy allocation to the healthcare sector. A significant chunk of that 20% allocation comes from biotech, a sector that has performed well in recent months and could continue to do so in 2021 as the world's focus remains on vaccine development and distribution.

Like QQQ, tech is the largest sector within QQQJ with the growth-oriented consumer discretionary and communication services sectors rounding out the top 4. The big three growth sectors account for nearly 90% of QQQ, but in QQQJ they account for a relatively more modest 70%.

You may assume that since QQQJ is generally categorized as a mid-cap fund that there are fewer easily recognizable names, but that's not really the case among the top 10 holdings.

Invesco Nasdaq Next Gen 100 ETF (QQQJ)

Invesco Nasdaq Next Gen 100 ETF (QQQJ)

I'd say most of these holdings are recognizable. There's a heavy presence of cybersecurity stocks with Fortinet, Crowdstrike and ZScaler (a popular stock in the ARK ETFs as well) maintaining top 10 positions. Roku, Etsy, AstraZeneca and Viacom have all become household names. Many of these names are exposed to the post-COVID internet economy and that makes them uniquely positioned to do well in the future.

QQQJ has only been around for several months, but Nasdaq has backtested the Next Gen 100 index to late 2009, giving a much better picture of longer-term performance. Not surprising given its comparatively heavy growth and tech focus, the index has been a top-tier performer in the mid-cap category.

Invesco Nasdaq Next Gen 100 ETF (QQQJ)

Invesco Nasdaq Next Gen 100 ETF (QQQJ)

Long-term performance has put this index in the top 1% in both the mid-cap growth and broad mid-cap categories.

What does this mean for the shorter-term? In short, it means that QQQJ has more than doubled the performance of QQQ since its inception last October.

Invesco Nasdaq Next Gen 100 ETF (QQQJ) Performance

Invesco Nasdaq Next Gen 100 ETF (QQQJ) Performance

The broader rotation into small-caps has certainly benefited this fund even though it's been a strong performer even before the past few months. If the cyclical recovery story is able to remain intact throughout 2021, I think QQQJ could be in for a big year.

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