XLK or QQQQ?

I was recently asked what’s the difference, in trading terms, between the Nasdaq 100 (QQQQ) and the S&P 500 Tech Spyders (XLK).
The short answer is nothing. For most circumstances, both ETFs will behave very similarly. As a proxy for the tech sector, I prefer using the XLK.
The longer answer is that there are some differences and if you use these ETFs for trading you might want to be aware of them
First, let me explain that the Nasdaq 100 is an index of the 100 largest nonfinancial stocks on the Nasdaq. For many years, this has been used as a proxy for large-cap tech stocks. The S&P 500 Tech index is simply a grouping of all the tech stocks in the S&P 500.
The important thing to keep in mind about the Nasdaq is that it’s very oligarchic, meaning there are a small number of very, very big stocks, and tons of teeny, weeny stocks. The NYSE is like that as well, but it’s much more pronounced on the Nasdaq. I don’t think most investors realize how important this is. Outside of the big tech names, the NYSE still has a huge advantage over the Nasdaq.
Not only do a few very large tech stocks have a large say in what the Nasdaq 100 does, but they tend to be strongly correlated with one another so their influence is even greater.
Of the 500 stocks on the S&P 500, only 73 are from the Nasdaq and more than half of those are in the tech sector. Ironically, of the 500 S&P stocks, they categorize 73 as being in the tech sector.
So for most practical uses, the QQQ and XLK will behave the same. The big difference is that the Nasdaq 100 also had a modest weighting in consumer discretionary stocks. This would be stocks like Starbucks (SBUX) or Bed Bath & Beyond (BBBY). The ETF for this sector is XLY. So while the XLK is highly correlated to the QQQ, you can improve the correlation some by holding a ratio of about 4-to-1, XLK to XLY. You can improve it some more by using a small amount of margin.
By correlation, I mean that the daily changes are correlated by over 95%. (Note: I got my numbers using the data from the indexes, not the ETFs.) Even with that it’s still a perfect match. The big tech winners this year have come from the Nasdaq (stocks like Google or Apple), so there pushing the QQQQ more than what you might normally expect.
Let me also add that the Rydex Inverse OTC 2x mutual fund (RYVTX) is designed to do twice what the Nasdaq 100 does each day.

Posted by on October 24th, 2007 at 10:51 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.