QQQJ vs. QQQN: A Comparison Of Two Nasdaq Next Gen ETFs

Both offer a high growth tech focused opportunity, but one ETF comes out slightly ahead.
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Throughout the past several years, the tech sector has been the one area of the market that investors have consistently come back to for growth and, yes, even safety. While the Nasdaq 100 (QQQ) doesn't offer pure tech exposure, it's used by many as a proxy for it.

Even during the COVID-19 recession of 2020, tech stocks continued to outperform the broader market. The tech sector actually began trailing the S&P 500 earlier this year when it appeared that cyclicals and value stocks were going to begin leading the way, but the reflation trade has since fizzled out and tech has returned to its familiar leadership position.

Throughout, the Nasdaq 100 has continued posting gains and is at record highs.

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With growth firmly back in favor, investors have searched for ways to add even bigger growth potential to their portfolios. Naturally, investors might assume small-caps would be that landing spot, but that group has badly underperformed large-caps since March. Still, the Nasdaq brand carries a lot of weight in today's market, which could help two specific high growth ETFs.

I'm talking about the Invesco Nasdaq Next Gen 100 ETF (QQQJ) and the VictoryShares Nasdaq Next 50 ETF (QQQN). Both target variations of the "next in line" Nasdaq 100 stocks. History shows that many of these "bubbling under" names eventually make it to the big index and catching them earlier in their life cycle could lead to above average returns over time.

The two ETFs are similar, yet different, and it's important to understand the differences between them to understand which may be a better choice for you.

Invesco Nasdaq Next Gen 100 ETF (QQQJ)

QQQJ tracks the NASDAQ Next Generation 100 Index, which quite simply invests in the 101st to the 200th largest companies on the Nasdaq. It follows the same rules as the Nasdaq 100 in that it eliminates non-financial companies from consideration. The fund and index are rebalanced quarterly and reconstituted annually.

VictoryShares Nasdaq Next 50 ETF (QQQN)

QQQN tracks the Nasdaq Q-50 Index, which, as the name might suggest, selects the largest 50 companies, based on market capitalization, that are not currently in the Nasdaq 100. It also removes non-financial companies. This fund works a little differently in that the index reconstitution is conducted quarterly in March, June, September and December.


While there are just minor administrative differences between the two ETFs, the big difference is that QQQJ goes after the Nasdaq's #101-200 largest non-financial companies, while QQQN goes after #101-150. That's about it.

Therefore, there mostly won't be any significant differences between the two portfolios, but let's break it down piece by piece for a comparison.



Both of these ETFs are relatively new, so there isn't much of a fund-specific track record with which to work. Since the common inception date, QQQJ has slightly outperformed, but that's only since the beginning of October 2020. The difference is most likely owed to the outperformance of small-caps, but those gains have reversed in recent months.

You can look back at the 10-year track records for the fund's underlying indexes to get a longer-term view. Over the past 10 years, the index for both funds has returned around 400% according to Nasdaq index literature. That compares to a roughly 200% return for the S&P 500 and a 150% return for both the S&P 400 MidCap index and the Russell 2000.

Expense ratios are very similar - QQQJ at 0.15% and QQQN at 0.18%.



QQQJ is the much larger fund of the two. It has over $1 billion in assets compared to around $145 million for QQQN. That makes QQQJ a better choice from a tradeability standpoint since both the expense ratio and average spread per trade are lower.

In terms of fund flows, QQQN managed to get out of the gate faster, but QQQJ has clearly emerged as the next-gen ETF of choice among investors. With small-caps backing off in recent months, net inflows for both funds have been virtually flat, although QQQJ tends to be more active in terms of trading volume.



Both funds are still less than one year old, so we really have only short-term risk metrics with which to work. In its early stages, QQQN has been slightly more volatile than QQQJ, which seems a bit counterintuitive given their structures. Neither fund has really lived through a period in which even a modest correction was involved, so I don't think there's much to be read into the max drawdown figures.



The differences here, again, are relatively small, but when we consider the portfolios as a whole, QQQN looks to have a bit of a growthier profile, but also comes with a somewhat higher valuation right now.

All of the major valuation metrics - P/E, P/S, P/B and P/CF - are roughly 10-20% higher for QQQN. While I don't want to overreact on straight valuation figures, this is a noticeable difference that might be surprising given that QQQN comes with less smaller company exposure. These are, however, trailing 12-month figures and could be changing as the economic recovery extends.



No major differences between the two in terms of composition. Both are heavily United States focused. QQQN is a bit more top heavy, which isn't at all surprising given how it has just 50 holdings compared to QQQJ's 100. QQQJ has greater exposure to mid-caps, also not at all surprising.

If you want to split hairs, QQQJ has slightly more tech exposure, but the factor I'd focus on a little more here is healthcare allocation. Most investors think of the Nasdaq exchange as mostly tech stocks. That's true in the sense that tech and communication services account for the majority of the index's weighting, but the healthcare sector is responsible for one of the larger allocations. That could be interesting to watch going forward. Healthcare has been a fairly middling performer for a while now, but its unique combination of both defense and growth could get some attention as growth rates slow over the next several quarters.



All of the top holdings, of course, in both QQQJ and QQQN are the same, just in different allocations.


There's a degree of hair splitting here given how similar the targeting strategies are for both of these funds. They both come with a high degree of future growth potential with the biggest differentiator being that QQQJ dives a little deeper into the small company pool.

Given its size and liquidity, I'd prefer QQQJ at the moment. QQQN at just under $150 million in assets isn't a small ETF by any stretch, but you can still see that the differences in terms of trading costs are still noticeable. The difference in expense ratios is small, but still a factor that works in QQQJ's favor.

Both of these funds will work will in targeting high growth opportunities as evidenced by their index returns over the past decade. Equity market risk is high right now and investors need to be aware that these funds will be very susceptible to deeper than average losses in bear markets.

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