One of the most popular ETF types for Canadian investors seeking exposure to large-cap U.S. technology sector stocks is the Nasdaq 100 ETF. By tracking the Nasdaq 100 index, these ETFs provide market-cap weighted exposure to the 100 largest non-financial stocks traded on the Nasdaq exchange, which include notable tech sector names like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Nvidia, Tesla (NASDAQ:TSLA), and Alphabet (NASDAQ:GOOGL).
However, the Nasdaq 100 is not a pure-play technology index. While 58.75% of this index is currently held in the tech sector as of June 28th, 2023 and many of its top holdings are tech companies, it also holds non-tech stocks like PepsiCo (NASDAQ:PEP), Walgreens Boots Alliance (NASDAQ:WBA), Honeywell (NASDAQ:HON), Moderna, Costco (NASDAQ:COST), Lululemon and Gilead Sciences (NASDAQ:GILD) to name a few.
Canadian asset manager Evolve ETFs is looking to change that. On June 14th, 2023, Evolve ETFs filed a preliminary long-form prospectus with Canadian securities regulators for a tech-focused Nasdaq 100 ETF. The pending Evolve NASDAQ Technology Index Fund (QQQT) will only target 38 companies in the Nasdaq 100 index currently classified as technology sector stocks. Let's take a close look at this upcoming ETF.
QQQT breakdown
As an index ETF, QQQT will track the NASDAQ-100 Technology Sector Adjusted Market-Cap Weighted Index, which as its name suggests only focuses on the performance of technology sector companies in the broader Nasdaq 100 index.
According to the index, whether or not a company qualifies as technology will be dependent on guidelines from the Industry Classification Benchmark (ICB) from FTSE International Limited. The index will be market-cap weighted, but with a 10% constraint on individual holdings rebalanced quarterly.
QQQT can employ a "sampling strategy" at the discretion of its manager. In this case, the ETF may only hold some of the stocks tracked by the index, enough so that its performance and metrics match it closely. This may be done to avoid illiquid stocks that are difficult to buy.
QQQT will launch with three versions: a Canadian-dollar hedged version as QQQT, a Canadian-dollar unhedged version as QQQT.B, and a U.S. dollar denominated version as QQQT.U. For more information on currency hedged versus unhedged ETFs, consider reading this article.
Expense ratios are undetermined right now as the ETF has not launched, but Evolve is proposing a management fee of 0.40%, which is close to the 0.39% expense ratios charged by existing Nasdaq 100 ETFs from BMO (TSX:BMO) and iShares. However, keep in mind that the real expense ratio of QQQT can be lower or higher upon launch, depending on waivers and operating expenses.
QQQT analysis
QQQT will likely be a strong competitor in a surprisingly under-represented portion of the Canadian ETF industry. According to the Cboe ETF screener, not many Canadian ETFs offer pure-play exposure to U.S. technology sector stocks, with the most notable example being the First Trust AlphaDEX U.S. Technology Sector Index ETF (FHQ).
While there are a plethora of Nasdaq 100 ETFs from BMO, iShares, Invesco, and Horizons, a tech sector focused ETF has so far been elusive. Sure, there are popular globally diversified offerings from TD (TSX:TD) like the TD Global Technology Leaders Index ETF (TEC), but again, these do not have a U.S. centered focus.
Evolve ETF's filing has been timed pretty well, coinciding perfectly with the recent run-up in large-cap U.S. tech stocks. QQQT's use of the Nasdaq Technology Sector Adjusted Market-Cap Weighted Index and the "QQQ" moniker also provides strong brand-name recognition.
The challenge for QQQT is whether or not the ETF will be able to successfully disrupt the economies of scale possessed by many of the leading Nasdaq 100 index ETFs in Canada, such as the BMO NASDAQ 100 Equity Index ETF (ZQQ) and the iShares NASDAQ 100 Index ETF (XQQ).
That is, will the pure-play tech focus of QQQT be enough to lure investors away from the track record of ZQQ and XQQ? Only time will tell. For now, I think this prospective ETF is worth keeping an eye on.
This content was originally published by our partners at the Canadian ETF Marketplace.