Today's Animal Spirits Talk, your book, is brought to you by Invesco. Go to Invesco.com to learn more about the Invesco NASDAQ Next Gen 100 ETF, ticker QQQJ. That's the Tech Juniors, is that right, Michael? That's right, Ben. All right, Invesco.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. There was a time there, Ben. When was it? Was it 23 when I was apologizing to the audience and to you? I guess, for, sorry, we're doing this talk again. We're doing it. We're talking about the Mag 7 because that's all there was to talk about. There was one year in particular, I do think it was 23, where the S&P was up, whatever it was, and X the Mag was basically flat or said differently. The Mag 7 was up 20% of the 493 were flat. It was that stark. And this year, we're recording this intro on February 9th. The spread between the equal weight and the cap-weighted S&P has never been this large. And I would imagine, well, I can't prove it, with a cursory glance, maybe I could, that if you were to equal weight the tech stocks versus tech, it would look similar, said differently. What about the juniors? Today, we're talking to Invesco about the junior Qs, the triple QJ. Yes. As of today, year-to-date basis, this is just price only. The next gen, which is the, yeah, the triple Qs with a J on the end, is up almost 6%. And the Qs themselves are just about flat on the year. So you're seeing this not only S&P and the NASDAQ. You're right. It was all like the biggest stocks are carrying all the weight. When is this other stuff going to play catch up? And now we're seeing that happen. And so we, on today's show, we talked to Paul Schroeder. Paul is the equity product strategist at Invesco, the QQQ equity product strategist. And they have all these different Qs strategies that they talk about. So we talked about some of them today, but we really highlighted these juniors. And so you have the NASDAQ 100, which is the 100 biggest. And then this is the next 100, right? So call it mid-cap kind of growth space. And yeah, it's outperforming this year. So here's our talk with Paul. Paul, welcome back. Good to see you again. Great to see you too. Thanks for having me on, Michael. If I'm a betting man, and I think our listeners know I am, I would bet that everybody who's listening to this knows of the NASDAQ 100. But I don't know that they are familiar with the juniors, the QQQJ, which is what we're going to be spending most of the show talking about today. Paul, who are the NASDAQ juniors? Yeah. Is that really what they're called? Or did you make that up, Michael? I just put up my radio voice. No, that's what they're called, no? Well, it's the Nasdaq next gen, but a lot of people within the firm, you know, the J obviously junior. So I think you hit the nail on the head, Michael. I call them juniors. I've always said there need to be more juniors. Like why do we reserve that just for precious metals? Junior gold miners and silver miners or should be for other stocks? Yeah, I couldn't agree with you more. I mean, QQQJ was launched in 2020 as part of our broader innovation suite. And to the point that you just made, Ben, I'm surprised that we didn't launch this sooner. uh you know to really capture the halo effect from the cues michael you're 100 correct you know i talk to people from my local community whether it's church kids basketball team my family and they're like oh hey i saw your qqq commercial very familiar with it you know in you know very frequently in nice cases you know like it's made me a lot of money through the years right uh but to your point not that many people have heard of qqqj right so really we launched it back in 2020 to really extend out what QQQ really provides exposure to. So you're looking at stocks 101 through 200 non-financial companies listed on the Nasdaq Stock Exchange that are in QQQJ attracts the Nasdaq NextGen 100 Index. We've been a big partner with Nasdaq through the years, over 26 years through QQQ. And I think it just makes sense to extend that out with all the success we've seen from the Qs through the years. Does that end up being more of like a mid-cap index or is it still technically large cap? So it falls somewhere in the middle. I mean, we define it as a mid-cap growth strategy. Morningstar defines it as a mid-cap growth strategy. So it definitely is. But I think the way that we like to really talk about it, especially now where we are in the market, is that it does generally tend to skew bigger than your average mid-cap growth strategy. I think when you look at something like the S&P 400, that could even be argued that it's borderline small cap. We're a little bit bigger in size from a market cap perspective within Jay. And the way that I like to think about it is it could be its standalone within the mid-cap bucket. Not that many people invest in mid-cap directly, but it's a good way to diversify against your large cap exposure. I'm looking at the holdings and the largest one is Sandisk. At the Ben's question, this is like a large company. It's $89 billion. I'm guessing that when you reconstitute, this will graduate out of the juniors? There definitely is possibility for it. I mean, we reconstitute it on the same schedule as the queues and the companies in the queues are strictly disqualified from being included, right? So you have zero overlap. And when they both change holdings, you generally tend to see about five to seven holdings move up from QQQJ and go into the queues right Every year you have things that pop up right What going to be the graduates that move from J into the Q We see about four to seven as I mentioned And that definitely at the top of the list of being the potential to move in. You know, I think as we saw earlier this year with the Q's, just last month, Walmart moved in because it changes where listed over to NASDAQ and AstraZeneca dropped out. So you get some of these off cycle additions. And if you have something like that, where Walmart obviously was never in, Jay, you might have a company like SanDisk get leapfrogged over by a company like Walmart. But I think looking at those top holdings by market cap kind of give you an idea, assuming between now and next December, how performance is of potential additions into the Qs. There's this idea that the NASDAQ is just all technology stocks, I guess, from people who aren't aware. But this is actually a pretty diversified portfolio. Like even the top 10 holdings alone, yeah, you have Sandisk and eBay and some of the core weaves and all those stocks that people know, but there's United Airlines. Ulta Beauty is one that sticks out to me because I have daughters who are really interested into skincare these days. Same. So I have to see all the Ulta Beauty supplies around. But even just looking at the sector weightings, tech is obviously the biggest sector, but there are, you know, there's a healthcare component here and there's a consumer component. And so this is, I guess this is probably more diversified than most people would assume. You're 100% right. So people just assume because the Qs is about 60% tech that QQQJ is about the same. As you alluded to, the tech exposure is half of that of the Qs, around 30%, 32%. Similar though, the top four are the same. Tech, consumer discretionary, healthcare, industrials, right? But I think with the type of exposures that you do see within healthcare and how fastly it has been growing within Jay, I think you do get a different sort of exposure within that. Even within tech, you get a different exposure within semis, within software. Software may be a dirty word over the last week, right? But within software, along with other components within the tech sector. This is a really interesting time in the market. it. Listen, let's be honest. The past couple of years were, I was going to say relatively boring. That's not exactly true. I mean, it's not, in fact, it's not true at all, but like the conversations that we were having, Ben, remember when it was like every week I was saying to the audience, I promise we're not going to do the Mag-7 this week, but in 2023, they were the only thing going up and the 493 were going sideways and it was just getting redundant. Now it was nice, right? If you're like a broadly diversified investor, like you were doing very well, obviously, the stock market had a great couple of years. But it was getting boring. And it was repetitive. And now, the story is a lot different. So you see small cap stocks doing well all over the place, renewed interest in them. And you're seeing that in the juniors as well. I was surprised to see that the juniors have outperformed the majors, is what I'll call the triple Qs in this context, over the last year. I'm curious if the type of conversations that you all at Invesco are having with your clients are reflecting the renewed interest. It definitely is. I mean, you have to think about our ETF lineup as well, Michael. You know, we have over 230 different tickers here in the U.S. alone, right? And the Qs obviously is a major part of that story. But, you know, we're trying to make sure that our clients' portfolios are diversified. So we've been having that conversation around diversification, concentration risk that's in the broader market. you know, within the S&P 500, you know, for the past three, past two years, really, you know, we have the largest equal weight S&P 500 fund. That's our ETF that's out there through RSP. So it's a conversation that we have been having. And in some situations, like back in 2023, it almost felt forced, right? Because everyone was so focused on MAG7, everyone excited about the AI revolution that was upon us. And obviously, the returns was driving a lot of that conversation. You know, what we've seen over the past 12 months is a broadening out that I think is very welcomed, at least within Invesco, and I think probably other asset managers as well, but also clients, right? You know, they're speaking to the end investor on a daily basis saying, hey, you need this diversified portfolio. And a lot of the conversations are, why isn't there more Palantir in my portfolio. Why? Yeah. Why? Why don't you own Palantir? Why do you own these boring ETFs? Why do you own this value ETF? Value investing is dead, right? When secretly, you know, over the past week or so, value has been up. It has positive performance, right? So there's these rotations that happen in the market. We're always doing our best to make sure our clients know that everything is cyclical and you need to make sure you are positioned for what might happen the next day, next week. And it's made the conversations a lot easier and has opened up the conversations to something outside of a top 10 holding within QQQ. I'll set the stage here. This is the first week of February we're recording this. And earlier this week, the big stocks were all rolling over and RSP, the equal weight that you mentioned, was making new all-time highs. And so you're starting to see this. And I think it's really the last, I don't know, 12 to 15 months, international stocks have done better and small cap stocks have done better and value stocks have done better and quality stocks and all these other places that you mentioned, these diversification pieces. So people who have been worried about the concentration in the market cap weighted indexes, there's plenty of easy ways to diversify now. It was just you had to force yourself to do it when it didn't feel very comfortable. Are you also seeing that in the flows these days? Are all these other funds starting to get more money because people are seeing the performance perk up a little bit? We definitely are. I mean, to give you an idea of where we were, you know, midway through 2025, we have a momentum fund, SPMO, which is, you know the top quartile of momentum ETFs over the past 12 months And it went from being about a billion dollar fund to about a billion fund right Just like that because of the exposure that it had you know it towards the the tail end though oh yeah right we started to see more flow come back into equal weight we started to see more flow come back into quality etc right so we definitely have seen it in the flow and fast forward to 2026 you know rsp has has bought in uh brought in several billions of dollars so far in net new flow off of i think this renewed skepticism around the hyperscalers, how much you're spending, and whether the revenue is going to be able to keep up with the spend that they have. One of the charts that I use all the time on our shows is RSPS, or actually RSPD divided by RSPS. And that is a ratio chart of the equal weight discretionary ETF at Invesco divided by the equal weight staples ETF. And I do that because the GIC sector, and correct me if I'm like mischaracterizing it, they have 40-ish, 40 odd percent, at least the last I checked in Tesla and Amazon. So that like really skews it. I mean, directionally it's the same, but when I look at the equal weight basket, that gives me a really good indication of where the market is in terms of like a risk on, risk off type of environment. you have the equal weight for every sector. And I'm curious, are people allocating there? Because for the last couple of years, it was S&P 100, right? It was mega cap or get out of here. Nothing else was working. Are we seeing more conversations? Is that too granular? Do people care about the equal weight sector ETFs? They do and they don't. I mean, it's obviously a very large suite that we have here and we're the only shop in town that equal weights those sectors, Right. So we do have a decent amount of AUM in them. But I think to really accurately answer that question, Michael, you have to think about the way our clients, these FAs, the way that they run their business. Right. We're running into fewer and fewer FAs that run and take specific sector exposures like that and using more of... Cowards! Using more models from the home office or taking more of a diversified, higher level, almost Morningstar-style bucket approach. With that being said, though, there are a few things you have to keep in mind with the Equal Aid sectors. Not only do you need to get your sector right, but you also have to assume that there's going to be broad participation within that sector. So when you do have some of the smaller companies really ripping within discretionary, outside of Tesla, then equal weight is definitely the way to go. And I think in general, discretionary is a great example of it. When you have such a high concentration, very few names, it really does make sense to equal weight perhaps all the time. if you are taking that sort of sector exposure. One of the areas that we've talked that really seems to be on investors' radars the last two to three years is anything with options. And I know you guys have in your suite some NASDAQ products that use options as well. Are you still seeing a lot of fanfare there from investors who really love to see that high income? Oh, we definitely are. I mean, you just think about where demographics are right now and the way people look at retirement, right? I mean, gone are the days of defined benefit plans and here are the days of defined contribution plans where you have to generate your own income, let alone people our age, right, who may not be able to rely on Social Security. You know, when we do retire, income products are here to stay and they're going to continue to be relevant. One thing I do find interesting is that, you know, 15 years ago, you'd talk to someone who was just entering retirement and they're like, if the 10 year was just at 5%, if it was at 4.5%, I'd throw my whole portfolio in that. Right. And we've had that for the past few years. And what did we get from that? We didn't get portfolios that were 100% treasuries. We got portfolios that augmented it with dividend income strategies, with structured note strategies. And obviously, as you alluded to, option strategies. Right. You know, it has been one of the fastest growing areas within the ETF business, not only within active ETFs in general, but option income. Right. And Invesco definitely needed and wanted to be part of that conversation. You know, we have a few different flavors of it. They are actively managed ETFs. But I think the one that's gained the most success has been QQA, which uses the NASDAQ 100 portfolio as the base, the primary portion of it. And it has an option overlay of it where it's basically selling covered calls, selling cash secured puts to generate around 10 percent above the index's dividend. Right. We pay that dividend out on a monthly basis. And we've been able to do that pretty successfully through the past year and a half, two years. So that whole idea of boomer candy, that's a real thing, that people really love these things because they'd like to see the regular income come in. It totally is. I mean, Eric Belchunas, I think maybe has coined that or I've heard him use that term quite a bit. You know, income is such a large concern of people who are retired, right? And I think with just where interest rates have been, if you think about someone who is 60 to 70 years old, they've only basically seen the 10-year treasury continue to fall, interest rates fall after they got smacked with their first mortgage at 8 to 12%, right? They're looking for something that might not only provide a steady stream of income, but also have a component to it that has some capital appreciation. And I really appreciate the advisors that are able to shift that conversation from not only the income or yield that a portfolio is bringing in. Also think about it from a capital appreciation standpoint, especially if it's in a qualified account. It's being taxed the same when you pull that money out regardless, right, as income. So why not look at it from two different angles along with the appreciation that equities have given over the past three to five years? Paul getting back to the Js how different is the exposure Obviously market cap is massive but in terms of the sector exposure is it too dissimilar or does it look a lot like the majors No, it definitely is a little bit different. And I think the part that sticks out to me the most is the healthcare exposure. We like to look at the exposures within QQQJ and the Qs, not only through your typical GIX or ICB lens, but we also dive a little bit deeper with the help of NASDAQ by looking at the different patents that these companies are filing as well. If you think about it, patents are really a roadmap for you to see what these underlying companies are really focusing on and where they feel their business is going to be, not just next year, but three, five, multiple years down the line. And where we see the most patent activity within QQQJ over the past 12 months has been bioinformatics, which definitely falls within pharmaceuticals, that biotech sub-industry. Right. So you do get differentiated exposures within QQQJ. You get less tech exposure, obviously, with the great job that NASDAQ has done with pulling companies that are either classified as tech or technologically focused companies to list on their exchange. that pool of companies does generally tend to skew that way. But overall, it is a great diversifier if you're looking at QQQ or just pairing it with the SPY or VLO. It has about 4% overlap with the S&P 500, 0% overlap with the Qs. So definitely a great diversifier. Okay. I'm curious about your low vol strategy. So you have a QQLV, which is 25 names of the lowest volatility over the last 12 months? Because I think a lot of people would think that the Qs have more volatility. What does this tend to own? What kind of stocks is that kind of fund owning? Yeah. So what you're generally tending to see, it's interesting the exposures that you do see come up. I mean, I don't think very dissimilar from other low vol strategies. You do tend to see some staples pop in there along with some industrials as well. It's a strategy that I think can definitely hold a place within a portfolio, especially if you're owning the broader market. If you think the way the S&P 500 has changed through the years to how growthy it has skewed to the point where Morningstar has to redefine the definition of growth a few years back, being able to tag on and complement your core exposure with something like a low vol, if you are a little bit more risk-adverse or like a QQA if you are more income focused or even a QBIG, QBIG, which owns the top 40% of the NASDAQ 100 if you have a longer term time horizon and are really leaning into the current themes of those larger companies. It makes a lot of sense. Paul, how long did it take you to boom, boom, boom, all these tickers? That's impressive. You know, it's something that takes years of practice. I started with Invesco back in the PowerShares days as an internal wholesaler, right? About 10 years ago, back when we still had that name before we dropped it and just went with Invesco ETFs. And I felt like a fish out of water. I was an FA before, moved to this side of the business. And back then it was maybe 150 different tickers, right? And everyone on the desk knows these tickers. They're rattling them off. You know, it's like muscle memory. You know, it's similar with even individual investors or FAs with stock, you know, AAPL, AVGO, NVDA. You know, it's just something that sticks. It takes time, though. It takes practice. So a consultant said to you guys, drop the power shares. It's cleaner. I mean, that's above my pay grade. I wasn't in those conversations. I really enjoyed the Power Shares orange. If you guys recall that back in the day, we had these, orange was our primary color. Now, with that being said, the Invesco blue that we have now is pretty sharp. Blue's my favorite color. But yeah, it was a sad day to see that name go. So we've seen a ton of innovation in the ETF space. And I think that's great for advisors and retail clients alike. Where are we headed next? Like what else can investors expect? Because at first it was just the index funds and you get this stuff at a really cheap cost, right? Get your beta exposure for super cheap pennies on the dollar. And then it got, you know, like I said, more, there's buffered stuff now and there's active ETFs and there's the options. Like where are we going next? Yeah. So I still think the active ETF phase is at the very beginning, even though we saw the most launches last year within active ETFs really dominate the launch space, I still think that's where we're going. I mean, if you take a look at what we've done at Invesco through the years, you know, a lot of these larger companies similar to us are launching the active strategies that they've typically housed in either an SMA or a mutual fund and launch that in an ETF, right? We're very active within that space. I would imagine we're going to continue to be active with that is we have a lot of really good active strategies within fundamental equity within the US along with fixed income. So I think we're still going to see a lot of growth within that. Now being kind of an ETF passive index-based purist, I generally try to stick with what falls in my wheelhouse like the Qs and individual factor-based investing and sometimes multi-factor. but I have become a nerd a little bit on options through the years. So all the launches we've seen over the past 12 to 18 months, you know, with this option-based income has really intrigued me. All right, Paul, where do we send people who want to learn more? So if you'd like to learn more about QQQJ, the Invesco NASDAQ next-gen ETF, it'd be Invesco.com slash QQQJ. Just learning more about Invesco in general, Invesco.com. All right. Appreciate it, Paul. Thanks for coming on. Yeah, thanks for having me. Great conversation. Good questions. Okay, thank you to Paul. Remember, check out Invesco.com to learn more. Email us, animalspirits at the compoundnews.com.
