One of the hottest investments of the last decade was the NASDAQ 100, a market-capitalization weighted index of the 100 largest non-financial stocks traded on the NASDAQ exchange. The index is very technology heavy at around 50% of its underlying holdings.
The NASDAQ 100 is often used as a barometer for U.S. mega-cap growth stock and technology sector performance. It is highly liquid, with funds tracking the NASDAQ 100 sporting trillions in assets under management. It also has an active derivatives market, with strong options and futures activity.
Despite losing over 30% each year at the tail end of the Dot-Com Bubble from 2000 to 2002 and suffering a 41% drawdown during the 2008 Great Financial Crisis, the NASDAQ 100 went on a massive bull run from 2009 – 2021. Since 2009, the index has delivered an annualized return of 19.48%, despite losing 30% in 2022.
Canadian investors seeking exposure to mega-cap U.S. tech stocks could consider one of the various NASDAQ 100 ETFs as a low-cost, transparent holding. However, there is a myriad of options out there, from vanilla buy-and-holds to more complex ETFs employing derivatives and advanced strategies. Let's look at some picks I found using the NEO ETF Screener. Keep in mind that compared to a broad-based U.S. index fund like the S&P 500, the NASDAQ 100 is significantly more volatile and more suitable for risk-tolerant investors.
Physically backed ETFs
The most basic NASDAQ 100 ETF is the vanilla physically backed variant. These ETFs either hold a basket of approximately 100 U.S. stocks or their USD denominated ETF counterpart as a "wrapper," otherwise known as a fund-of-funds structure.
Now, because the underlying stocks of the NASDAQ 100 trade in USD but the NASDAQ 100 ETF itself trades in CAD, there's additional volatility. How this affects your returns depends on if the fund is currency hedged or not.
- If the ETF is hedged, fluctuations in the USD-CAD exchange rate will not add volatility, but you will lose some returns due to the cost of hedging (currency futures).
- If the ETF is unhedged, fluctuations in the USD-CAD exchange rate will add volatility. If the USD appreciates against the CAD, the fund will gain additional value, but vice-versa if the CAD gains.
For an in-depth analysis of the pros and cons of hedged versus unhedged funds, I suggest giving this article a read.
The following ETFs are possible choices for investors looking for a vanilla buy-and-hold. Clicking on the link will take you to a page where you can see the ETF's details, including expense ratios, assets under management, and historical performance.
- iShares NASDAQ 100 Index ETF (CAD-Hedged) (XQQ)
- BMO (TSX:BMO) NASDAQ 100 Equity Index ETF (CAD-Hedged) (ZQQ)
- Invesco NASDAQ 100 Index ETF (CAD-Hedged) (QQC.F)
- Invesco NASDAQ 100 Index ETF (QQC)
- Horizons NASDAQ-100 Index ETF (HXQ)
Synthetic ETFs
More complex NASDAQ 100 ETFs can be synthetic. That is, they are not backed by physical shares of the underlying companies. Rather, these ETFs use derivatives, like swaps, options, or futures to achieve different investment objectives, such as enhanced tax efficiency or magnified exposure.
More advanced NASDAQ 100 ETFs can use derivatives to achieve magnified daily exposure. These ETFs are often used by day or swing traders. A popular example is the Horizons BetaPro NASDAQ 100 2x Daily Bull ETF (HQU),which targets a daily return 2x of the NASDAQ 100 ETF net of fees.
If the NASDAQ 100 rises 1% in a day, HQU will rise 2%, and vice-versa if the index falls. HQU is therefore a leveraged ETF, which is intended to be held for short periods. It also has an inverse counterpart that does the opposite, the Horizons BetaPro NASDAQ 100 -2x Daily Bear ETF (HQD).
Word of warning: holding HSU or HSD longer than a day can produce long-term returns that differ significantly from the 2x daily leverage target due to compounding and volatility decay. Finally, like most leveraged funds, HSU and HSD are expensive, costing upwards of 1.50%.
Finally, we have covered call NASDAQ 100 ETFs like the Horizons NASDAQ-100 Covered Call ETF (QQCC). This ETF sells a derivative known as a covered call to enhance the yield, giving it increased income potential. Essentially, the ETF sells its future upside for an immediate cash premium, which is distributed on a monthly basis to investors.
Because the underlying NASDAQ 100 index is so volatile, QQCC can harvest that volatility for a bigger premium. Currently, the estimated annual yield stands at 12.42%. However, this isn’t a free lunch. By selling covered calls, the ETF can potentially give up gains during a strong bull market. For a more in-depth analysis of the covered call ETF strategy, I suggest giving this article a read.