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What if I told you that Triple Q is not the best way to get exposure to tech? It's not the best way to get exposure to the growth factor and it's a terrible way to get exposure to the momentum factor. You see, a lot of people, maybe most people, buy Triple Q for at least two of those things I just mentioned.
And if I'm being honest, a while back, I even bought Triple Q at one point and two of those reasons were part of it. But this is so important because there is a hidden issue with Triple Q nobody's talking about. So in this video, I'm going to show you a better way to get exposure to tech instead of using Triple Q.
But the next question that we have to ask is what are you actually buying when you buy Triple Q? And the best way to answer that question is to compare it to ETFs that are supposed to give you exposure to tech or are supposed to give you exposure to growth. So can Triple Q or QQQ or the Nasdaq 100 ETF, can it compete with XLK, the State Street Technology Select Sector ETF?
Can it compete with IGM, the iShares Expanded Tech Sector ETF? And for the growth side, can it compete with SCHG, the Schwab US Large Cap Growth ETF? Let's paint a picture of what these ETFs look like in terms of expense ratio, Triple Q has a much higher expense ratio than XLK and SCHG. IGM is way up there at 0.39%.
Moving to risk, the max drawdowns of these ETFs, going back to December of 2009, XLK actually had the lowest max drawdown, while IGM had the highest max drawdown. Although XLK, SCHG, and QQQ were all pretty similar. Then in terms of volatility, SCHG and Triple Q are very close, while IGM and XLK are higher.
In terms of holdings, XLK is actually the most concentrated with 76 holdings. Triple Q has 100, SCHG 196, IGM has the most with 291 holdings. And in terms of size or how many assets under management are inside these ETFs, Triple Q is huge. It's one of the most popular ETFs, it's an ETF that people kind of just default and go with.
That's why we're making this video. And returns are important to a lot of people because a lot of you, you do choose ETFs based on returns. So let's talk about returns. Highest 3-year return, IGM. Highest 5-year return, XLK. Highest 10-year return, IGM. If you invested $10,000 over a 10-year period up until today, IGM gave you the most money, closely followed by XLK.
So what should this tell you? If you're investing in Triple Q to get tech, it underperformed pure tech ETFs. If you're investing in Triple Q to get growth, it did outperform SCHG, an ETF that has a methodology that seeks to find stocks exhibiting characteristics of growth. This does not mean growth as in it has the highest return, it invests in companies that have higher valuations because they tend to probably be growing faster than other stocks which would be considered value stocks on the other side of the spectrum.
So so many people want tech that they decide default, I will invest in Triple Q. Why would they do that if it underperforms tech? Well, maybe this poll will help you understand. And by the way, let me also tell you that I have not mentioned Triple Q in this video, but let's use them synonymously. Triple Q M just has a lower expense ratio than Triple Q, same ETF.
If you're just a long-term investor, treat them the same. Triple Q M has a lower expense ratio. So I asked, "What makes you own Triple Q or what makes you avoid it?" The most popular response was that it feels like a safe growth bet. The next most popular with 33% is I want exposure to tech. So the majority of people either want what they consider a safe growth bet or exposure to tech.
Then some of the other people, 18% of people who are probably being more honest than others, honestly, they invest in it just because it performed well. And then the most honest people, 10%, they say, "I don't fully understand it, but everyone owns it." And I got to tell you, in the past, when I just defaulted and bought Triple Q, I was partly in that it performed well and everyone owns it type camp with a little bit sprinkled in of maybe it's a more safe growth type ETF.
But I must say, I did not think about it when I bought it. It was like in a rush. I want some exposure here, I need something that has a little higher risk, I'll get some tech exposure, maybe it could grow more in certain market environments. Okay, fine, I'll just buy Triple Q, whatever. And I think a lot of people do that exact same thing.
But these days, the reason I don't own Triple Q anymore or Triple Q M is because I don't care about having exposure to just tech. I know I have a lot of tech exposure already in the different things I own, and I'm not making a bet that tech will do better cuz honestly, at this point, who really knows?
With AI, a potential new market dynamic in the future with technology, I don't know and I don't really want to make the bet after watching these companies that had printed money for so long with almost no expenses. Suddenly, they're spending all of their cash flow. They're not printing cash anymore, it's all going into AI, companies like Meta.
So I don't want to play that game, but I will tell you if you do want to play that game, better way to play it. And I'll show you some portfolios that will actually solve some of the hidden issues with Triple Q. But I do want to introduce you to the way I invest real quick, which is factor investing.
What I've done is I've broken my portfolio into the momentum factor, in which case I invest in US momentum, I invest in US value, I invest in international momentum ETFs, and I also invest in international value ETFs. So I have two factors, I have momentum and I have value. If you want to follow along with this portfolio, you want to get updates from me a couple times a month to hear what I think about what's going on in the market, maybe an email about why maybe Triple Q has some problems, well, you can sign up for that below.
And we'll show you with everything crazy going on, this portfolio is beating the S&P 500 by 5% year to date. And if you go back all time, while I was not using a factor portfolio strategy this whole time, it has beat the S&P 500 by 1.54% going back to 2022, just being transparent here. But if going back to this year to date number peaks your interest about factor investing, investing in momentum, maybe investing in value, let me show you about factor investing real quick because one way to understand Triple Q is to understand factor investing because the way I see it and a lot of academics see it, factors in the stock market can explain almost 95% of returns.
To be honest, with Triple Q, which you'll see, the exposure to a sector, the tech sector, having more weight in that has given it some extra returns, but there's no way to know if that's going to happen going forward. But as you'll see now, factor premiums have been studied in many different markets over many different time periods.
There's empirical evidence that they should help you outperform over the long term. If you look at factor premiums going back to 1963 to 2023, what you'll see is that small companies beat large companies, investing in companies that exhibit value characteristics beat those with growth, companies with quality characteristics beat those with junk, and companies with high momentum beat companies with low momentum.
To quantify this, the size premium over this time gave you 2.78% extra every year. So just for example, if you made 10% in the market, just by investing in the general market, let's say the S&P 500, well, you would have made 12.76% by investing in smaller companies. And the value premium, it's plus 3.72, quality plus 3.36, momentum plus these portfolios are constructed, assume that you could get half of this.
If that was the case, you're still talking about 1.38% investing in smaller companies, 1.86% investing in value, 1.68% investing in quality, and 3.72% investing in momentum if you only get half the historical premium. Now, even if we shave this off more, you're still talking about, let's say, maybe an extra percent a year over the market over the long term.
And if you did do that, it would end up being a lot of money over your investing lifetime. And then the next obvious question would be, where does Triple Q fall in when it comes to factor premiums? What characteristics does Triple Q exhibit? And if at the end of this you don't care about factor premiums, we still will show you a better way to get exposure to tech after this.
So after doing a factor regression on these ETFs, this is what it shows. Triple Q, SCHG, XLK, IGM, they're all considered growth ETFs. When you do a factor regression, basically you would say it loads on growth. These companies, they act like growth companies. So they all do. To give you some context, we need to compare this to some ETFs that don't show this.
So let's throw SPMO or SPMO, that is a momentum ETF. And what you'll see is that it does not show growth or value. So SPMO is neutral. It doesn't act like an ETF that invests in growth stocks should act like. SCHD, it acts the opposite of what Triple Q, SCHG, XLK, IGM, it's the opposite. It acts like value stocks.
SCHD is the Charles Schwab High Dividend ETF, very different than these other ETFs that we're talking about. So we can do these factor regressions to see if over time these portfolios act like a certain factor should be acting like. How about big or small? Triple Q, SCHG, XLK, IGM, they're all big. They invest in really big companies, they're huge companies.
SPMO also because it only invests in S&P 500 stocks, it's big. SCHD doesn't load on big or small. So you could consider it more of maybe a blend. Then if we took a look at quality or junk, none of these ETFs show characteristics of quality or junk. SPMO also does not exhibit qualities of quality or junk, but SCHD does load on the quality factor, investing in companies that have high quality metrics.
There's another factor called low beta, which is basically lower beta stocks, companies that move less than the market. So a high beta stock would move more than the market when it goes up, more than the market down when it goes down. It's high beta, it's got more volatility, it's kind of, you would maybe call more risky.
Low beta stocks have been studied and empirically proven that they give you better risk-adjusted returns. So, do these load on high beta or low beta triple Q and SCHG? They don't load on any of those. They're neutral. But XLK and IGM, they're high beta ETFs. And to compare this to SPMO, also does not load.
And SCHD, it's a low beta ETF. Now, here's momentum. This one may blow your noggin. Do you consider triple Q to be a high momentum ETF? 43% of people said yes to that. So, is triple Q a high momentum ETF? The answer is no, but it's a resounding no. As you can see, it's not neutral and it's not a high momentum ETF.
It is actually a low momentum ETF. It does not capture the momentum factor. Nor does SCHG, XLK, or IGM. But you know what does? SPMO, as it should because it is literally designed to invest in high momentum stocks. And then SCHD also does not invest in high momentum stocks or low momentum stocks. It's neutral.
This is actually fascinating to me that SCHD technically has higher momentum than triple Q, SCHG, IGM, and XLK. I think that's pretty noggin-blowing. If we put this all together, triple Q's factor profile: growth, big companies, low momentum. Literally factor investor's nightmare. A factor investor would want value over growth, small companies over big companies, and high momentum over low momentum.
It's the opposite of what a factor investor would want. Same with SCHG. Same with XLK. Although XLK also has high beta. IGM, high beta as well. SPMO, big companies that exhibit high momentum. SCHD, value companies that are not considered big or small, but also have quality, which is what you want as a factor, and also low beta, which is also what you want as a factor.
In terms of factor investing, to be honest, SPMO and SCHD look better than all of these other ones. So, if you've been having an inkling of maybe thinking that factor premiums are real, you got to understand that you are making a bet that it's technology that's going to be driving these ETFs higher.
Or if you're investing in SCHG, you're making the bet that value is done, growth companies are where it's at now. But remember, I said there was a hidden problem about triple Q. It involves what happens when you overweight tech and what's happening with triple Q and the way it's doing it. So, to start, triple Q, it literally is only the largest 100 stocks trading on the Nasdaq on one exchange in the US.
That's the methodology. It also There's another piece of this methodology leading to the issue. We're going to go over that in a second, but I just want to show you that the S&P 500 index, SPY, VOO, they're largest 100 publicly traded companies on two exchanges. That's the difference. The Nasdaq, triple Q, it's only one exchange.
It's only Nasdaq. I already think that this is a flawed methodology, but let's wipe that aside. These are the sector weightings of triple Q versus SPY. Or we could say the sector weightings of invested in the largest 100 Nasdaq companies versus the largest 100 companies that trade in the US stock market.
One way to visualize this is by saying which has more of each sector. So, the way you're reading this part on the right side is the triple Q portfolio has 26.7% more tech than a portfolio of SPY or VOO or the S&P 500. So, we already know this. We know that there's more tech in Nasdaq. But here's the other problem, the problem that a lot of people don't even talk about.
In order to get this, you had to underweight something. And so, what happens is you are taking a bet when you buy triple Q. You're saying, "I don't want financial services. I don't want JP Morgan. I want Bank of America. I want Visa. I want MasterCard. I want Berkshire Hathaway." You're saying, "I'm taking a bet that those stocks I don't care about them.
I don't want them." I don't think a lot of people realize that. By only investing in the Nasdaq, you're missing out on a lot of amazing companies for this idea that at least I have a bit more tech. Also, by the way, you have more consumer discretionary inside triple Q than SPY. The other ones, of course, there are differences.
They're not quite as big. So, those are the big ones to me. Now, what is a better way? In my opinion, here are some ways that you could do this. You could say, "What does 60% SPY, 40% IGM look like?" So, now we have about the same technology exposure if we go 60% SPY, 40% IGM. We get back that financial services of 6.2%.
We have less consumer discretionary, but it's not zero. Then we actually have more telecom. So, this is one way to do it. In my opinion, you are basically still getting exposures to all the other sectors of the stock market. But to be honest, this next one is going to put you closer with the general market in terms of sectors.
This is the preferred one I would do. So, this is 60% SPY, 40% XLK. What you would do is you would say you're going to get about the same tech exposure doing this. Financial services, now you get 7.4%. A much more even distribution between the different sectors. To show you the difference between triple Q here, you'd have much more financial services, of course, in this SPY/XLK portfolio.
And you'd have less consumer discretionary, but you'd be closer to the S&P 500 in terms of its sector weightings, but you would just have more tech. So, in my opinion, triple Q is not the best way to invest in tech. There are unintended consequences. And if you want growth, well, triple Q does show characteristics of growth, there's no methodology that seeks to find growth stocks.
You know that saying, "More things change, the more they stay the same"? That works for SCHG. If the market changes, it doesn't matter. SCHG will rebalance and find growth stocks. If the market changes, triple Q won't do that. It will only invest in the stocks that have the biggest weights in the Nasdaq.
So, if you're searching for growth stocks instead of value stocks, triple Q is not the best way to do it. It's a terrible way to get momentum. There's a better way, in my opinion, to get exposure to tech by blending SPY with XLK or blending SPY with IGM if you prefer. But triple Q is literally the opposite of what a factor investor would want.
But if you are interested in understanding some ETFs that would fit into a factor that has been proven to have a factor premium, well, you can watch this video right here.
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