Why the NASDAQ’s QQQ’s higher returns come with greater volatility


Sep. 11 2014, Updated 5:00 p.m. ET

QQQ outperformed SPY and DIA

The PowerShares QQQ Trust, Series 1 ETF (QQQ), is the fifth-largest U.S. ETF by assets under management, while the SPDR S&P 500 ETF (SPY) happens to be the world’s largest ETF in terms of asset size. It has also given better returns to its investors compared to the SPDR Dow Jones Industrial Average ETF (DIA), which invests in the top 30 blue-chip U.S. stocks.


Comparing returns

Comparing the returns generated by QQQ, SPY, and DIA over the years, you can see that QQQ has easily delivered more to its investors than SPY or DIA. You can see this trend in the chart above. QQQ has been able to generate better returns over the past year.



Comparing volatility

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It’s important to keep in mind that the NASDAQ Composite (QQQ) is slightly more volatile than the S&P 500. QQQ’s beta, which is the relative volatility versus the market (usually represented by the S&P 500 index) is 1.1, calculated using monthly returns going back ten years, or as high as 1.4 if you go back 15 years to include the dot-com crash. This means that when the S&P500 rises 1%, QQQ is likely to rise 1.1%. But the opposite is also true when the market falls.

On the other hand, the Dow Jones Index (DIA) is less volatile, showing a fairly stable beta of 0.9, even during the dot-com crash. The reason for this difference boils down to the fact that the QQQ tracks the NASDAQ-100 index, which is a tech-heavy index (as we discussed in parts 1 and 2 of this series).

Technology companies with a higher beta, generally closer to above 1, tend to be more volatile. Beta measures a stock’s volatility—the degree to which its price fluctuates in relation to the broad market index. For example, Oracle (ORCL) and Google (GOOG) sport a beta above 1. Moreover, QQQ is less weighted towards consumer defensive and communication services, which are less volatile industries.


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