Evolution of QQQ and Investor Options

Today's Animal Spirits Talk your book is brought to you by NSdAq. Go to nSdAq. com to learn more about the NSDAQ one hundred Research on the NASDAQ, all these things NSDAq. com to learn more Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batniick 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 Rid Hol's Wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Brid Holz's Wealth mananagement may maintain positions in the securities discussed in this podcast Welcome to Animal Spirit with Mikeel Ben.n today's show we talk to Mark Marrickx, Mark is the global head of Index inssights for NASDAXs. We talk about the history of the NASDAQ one hundred. I learned a lot on today's show. There's new rules about inclusion Which makes sense. Listen, it's not nineteen whatever anymore Like things have changed and so the criteria for inclusion has to be modernized and updated and it wasn't we get into that. Mainly because companies are staying private longer and coming public at bigger valuations. Right, right, right It's not the twenty twenty two NastST one hundred anymore, Ben New things have come to light And it's been a minute, but we're having that conversation again that conversation being Uh, is this nineteen ninety nine all over again? And so they've done awesome work. They published a couple of papers about the differences between the index construction in nineteen ninety nine and today We got into all of it. a lot of really good charts. There was some data that there was a data point in this podcast that blew my face off. There's a ton of great stuff here about now versus. com buubble History of the NAazC one hundred We did all that in a lot more with Mark Merrickxs from NASA Lark, welcome to the show Thanks, Michael Great to be here So we've spoken with you before. we speak about the NASA one hundred seemingly every week. I was like, o, what are we going to talk about? It's You know? Only so many times we can mention it. And I was wrong because there's so much talk about because There is a lot happening in the NSDAQ one hundred ecosystem famamously NSDAQ shared rights with Inestca to launch the cQues back in whatever year that was it Did't launch in nineteen ninety nine or two thousand? nineteen ninety nine. Yeah. Unreal. There was news recently that Back bothoth Blackwk and State Street are also going to be going to have access to U use the name the NSA one hundred. and Last week, I was reading a blog post from this guy Mark Rubenstein, who writes a wonderful post called net interest And he wass talking about some of the potential rule changes, which maybe we'll talk about today to get into the NASA one hundred. Of course The market structure is very radically different today than it was back when the rules were invented. So maybe a facelift makes sense But one of the things that Mark said was In the past twelve months, it earned, meaning NSdDAQ It earned eight hundred fifty four million dollars in licensing fees, of which around a third are from the Qs So you guys have this wonderful Um post looking at what's it called? the u The NASA one hundred ecosystem, the evolution into power investor choice worldwide, where you share just how gigantic the NASA one hundred ecosystem is. And on top, you've got this big black bubble, that's one point four trillion dollars with webs going out all over the place, showing what That encompasses so The Q is as of whenever this was published three hundred and fifty one billion dollars, the QMs, you've got mutual funds, you've got derivatives. I mean, the structure notes, this is a massive I I'm not breaking news here. This is a massive massive ecosystem And I don't even have any questions to you. This is a terrible leadeting and where should we start? I'm asking you to guess, whereere should we start I mean, I'll start with, you know, you you're saying it's not breaking news in the sense that, you know, this has been building for years now and we just happen to write a paper on it for the first time a few months ago, my team did and we're sort of the global index inssights team at NASDAQ. I think though it is news for a lot of everyday investors when they sort of look at the numbers on the page for the first time and actually try to think about what it means to have a trillion plus ecosystem around this index, given that, you know, like you said nineteen ninety nine was really the first major product launch for most types of investors. There were products in the option space before that Um but nineteen ninety nine was that first ETF launch U And over the last several years, I would say is when things have really gotten into high gear in terms of all these different flavors of accessing the NASDAQ one hundred Tue ETF, which is such a great, you know, incubator of creativity in terms of product development and bringing different types of strategies to different investors, right? And then That's sort of really only one half of the story, right? One half of the chart that we came up with The other half is everything else that's happening in the derivative space, the future space structured products, insurance products, which includes things like fixed index annuities reggistered index lent annuities That is almost half of the pie on its own, right? And so when we looked at this, we tried to think, okay, what's the right way of summing all of this together Don't pick a single date at the end of the year. There's seasonality with things like, you know derivative notional Obviously, the market goes through cycles over the course of a year in terms of performance. So we looked at average twenty twenty five What's the average exposure across the entire ecosystem Cash, assets under management and things like mutual funds, ETF, derivatives notional onene point four trillion. That was thirty five percent growth over twenty twenty four U And really when you look out at the at the universe of indexes that are out there, S and P five hundred is the only thing that's larger than this as far as we can tell And there's a big gap between NASAC one hundred and sort of the next tier below it. It really isn in a unique place in its history and evolution It's like a brand now essentially, right? The NAazAq one hundred, it's not just NazAq, obviously, but NazAq one hundred itself is now a brand It's like Nike It's it is kind of like that, right? Because people look at it as, you know, I often when I present on this to different types of investor audiences, I ask people to do A thought exercise which is, you know, when you look at the U.S equity market, obviously, it's kind of been two big names now for several decades, NAastTA recognizing And I ask and I tell people to think, okay, if you're a company, if you're Apple or Microsoft or Amazon or whoever and overver the years, you've thought about going public and you've shopped around for where to have your IPO and you have these two main options. there are actually more options back in the eighties and nineties, but let's say there were these two main options and it was a random decision. It didn't matter. D didnn't matter where you listed, right Slip a coin What are the odds that today you get to a place where the eight largest companies on the planet by market cap all NASAC listed That's not random. It'szero point four percent to flip a flip a coin and get eight heads in a row. That's the that's the probability. So It means something to these companies to list on NSDAQ given the success of Apple and Microsoft and Amazon and NVidia for decades. It also means something now to be listing in a venue where, you know, on in any given year, right? NASDAQ is the leader in terms of Total listings, new listings Switches. we had the Walmart swwitch at the end of last year, which was just a monumental shift in market cap in a single day close to a trillion dollars switching over to us. And it really now the exchange represents where the new economy sectors, not just tech, but a lot of the consumer discretionary space, healthcare in the form of biotech someome other areas where they choose to raise capital. really matters in the sense of signifying to their investors to the general public like, hey, how do I think about my company from a strategic standpoint? I want to be innovation driven innovation forward, and I want to be part of this community of innovators that's been built up over fifty years I want to list on NASDAq. That's increasingly sort of part of the PR and the statements that companies release when they list or they switch. And where where better to see that than in the NASDAQ one hundred where you have those eight largest companies on the planet, not to mention ninety two others that we happen I think are pretty special too So the NASC one hundred, getting back to this this bubble that you have, it's one point four trillion dollars Just to break it down because I think it's I glost over that a little bit Within ETFs. All right, so the cQues are three hundred and fifty, but it's not just the cues. So the total ETFs that are linked to the NASA one hundred is five hundred eighty seven billion dollars. You have seenty five billion dollars in mutual funds which is like around the area but it's still seventy five freaking billion dollars You have six hundred forty seven billion dollars worth of derivatives fifty one billion in instructred notes and as you mentioned, fifty two billion dollars worth of insurance. The flywheel is spinning rapidly because the importance of getting access to this capital medicine I am I am, I don't know, eighty five percent what had hard to handicap Overwhelmingly, I believe the majority of where a stock goes Not every single day, but ultimately like over, you know, over the longer term is driven by fundamentals firmly believe that cannot convince me of otherwise. However In the intermediary term, whatever There's no doubt that at this level of capital, one point four trillion dollars Getting into this index and getting the flows, of course it matters. You'd have to be a fool to suggest that it doesn't have any sort of impact on brand, but literally like price, just money coming in off course it has to matter a little bit And one of the things that I mentioned earlier in the show is the rules of this index were written a long time ago before anybody who wrote the rules could possibly foresee what this was going to do to the investing landscape And now you have companies like SpaceX that are on the road to u to be traded publicly comoming public at a evaluation north of a trolley and possibly even close to two And u prior to whatever rule changes are being considered, it would have taken a minute to get into the index. So could you talk about what the previous regime looked like and whatever is public that you can share in terms of where this might be going Sure, sure. So I'll lay it out for you, I guess in in sort of high level how we used to manage the index and we did implement this set of methodology changes on may first. That is now effective. Right? And the way we went about that is similar to other methodology updates that we've conducted over the history of the index. There's been a few of those Right? We had a formal index consultation process where we went out to our asset manager partners like Inesco and others, anyone who's in the ecosystem, we went out to you know, a sampling of investors as well to say, look, here are the proposed changes. Here's why we're looking to do this What's your feedback? And there was feedback in that process that impacted what we ended up changing and to what extent, we ended up changing it. and I can go into some of that in a little bit, but sort of the The high level headline, right, I think that you're getting at is the fast entry thing, which is not something that NSDAQ is alone at looking at. S andP is also looking at it and some others Um, And I think it's it speaks to the evolution, again, as you alluded to of the equity markets over the last couple of decades, which is simply that, You know, when Google IPOed, when NVidia IPOed, they were not trillion dollar companies nowhere near that Right? They were still typical sort of, you know, maybe a couple hundred million in or a couple billion in terms of market cap as they were, you know, transitioning from private to public Now Um you've got obviously, everybody knows this, VC has way more deep pocketbooks than they used to have. They're able to fund these companies for much longer, private equity to some extent as well And just the very nature of, I would say, what it means to be a technology company today or to be technologically innovation driven means that you can scale way, way, way faster in terms of revenue and market value than you used to be able to in legacy sectors and that's part of actually a piece of research that we're in the process of publishing in the next week or so. And so you have the situation, right where companies get super, super valuable before they need to tap the public equity markets, but that ends up being the end goal for somebody like a SpaceX or an open AI or an anthropic and we don't know where any of those are gonna to list, right? That hasn't been made public yet. I think I have an idea I mean, you know, people bet on this type of stuff, I'm sure, right? So you have your own ideas, right? And so what we wanted to do was, you know, not have an index that takes potentially almost a year to respond to changes like that Because what we used to have was an annual reconstitution in December once a year in December Right? Rrank who are the top largest by market cap on NSDAQ, makeake a bunch of deletions, make a bunch of additions right around that annual reconstitution event. There were other rules in place Throughout the year, for example, if you were too small, if you were less than a ten feet of a percent of index weight two months in a row you would get deleted as a constituent, and you get replaced by whoever's next in line to replace you. If a company went private or switched over to Na or somebody else, right That could happen entry year Now we have a process that's going to be a quarterly reranking instead of annual And we have this rule around fast entry where you look at the top forty, if you're in the top forty byy full market cap in terms of your ranking you can be evaluated on the seventh trading day and if you're eligible, you'll be added shortly after that with all the other sort of liquidity requirements. remaining. And so there's other changes to the rules in place here around things like float where, you know you used to have to wait till ten percent of your shares were publicly floated to get added thenen you get added at your full sort of listed market cap. We looked at that and decided there's ways to improve that. There's ways to sort of scale up your inclusion in the index if you're still a low float company until you get to have about a third of your market value flat publicly floated, then you're sort of you stop getting scaled up, right? So there's some of these other changes that we made on the margins to Again, make the index more reactive, more representative, more responsive to what's going on in the market What if you just said we're going to market cap weighted? W that just cut through everything? And why isn't it just market cap weighted? where you say, Hey we're going to take the biggest hundred stock Well, that is what we're doing now. That's kind of what it is what the new rules are then I guess. The new rules are, so let me put it a different way, right? There There's a whole separate consideration to how index methodologies work, which is also from the asset manager's perspective, InSco or somebody else who has to actually track this right and implement and try to stay as close to the index uh sort of weights and constituents day to day R? You want to sort of reduce the noise day to day in terms of how much you are trading in and out of that portfolio to ensure full replication or nearly full replication. Right? And so You could in theory do it like every day. You could say, who are the top one hundred rank companies every single day But then you have market movements every single day and you're trading around that and reranking and it's notot necessarily the most efficient thing to have it update that frequently But quarterly is actually quite common. A lot of the indexes we've launched in recent years tend to follow more of a quarterly rebalance and reconstitution schedule. And so this eliminates a little bit of the intricorder noise other than it has this Fast entry criterion for the top forty biggest names Um, and it also, you know eliminates this potential situation where, okay, if you just missed the December annual recon And there are no sort of intra year exits because of companies getting too small or delisting or going private then you're not sitting out almost a year's worth of potential gains from someone big coming onto the exchange like a spaceX, like an open AI This this is U'm I let's say overdo, it sounds rude, This makes a lot of sense Pt pretty it's commonense yeah, So I think one of the interesting things about when the NadDk one hundred first came out, the ETF U the timing wasn't great because within, I don't know less than a year, the NazAak went into an eighty percent drawdown Right So the fact that it survived this long Th you starting cut you up. you're going to love this one I saw I saw a tweet today different cololin That said, if you invested Remember your video or your post Bob the worldld's R Mark timer? Yep. Cullen said that if you invested at the peak I't know if I was one of theQuesers launch at the peak which is basically the same thing And you held on to today LL easier said than done, but this is the this is the fact. Jack You compounded it eight point eight percent a year for twenty five years or whatever twenty six years. Is that even evenven if you include that eighty percent, I think it was like eighty two percent drawdown But the crazy thing is, if you've been invested for the past ten or fifteen years You have no memory of that. And you look at it and you go, oh my gosh, and I look at this week In the past ten years The Nazq one hundred is up almost twenty two percent per year which is in like rareified air It's we over six hundred percent total return. It's kind of it's close to like the roaring twenties or Japan in the nineteen eighties or the returns are unbelievable. It makesen just casually mentioning every other great bubble of our time. But it makes sense in the context of, yeah, there was this huge crash before. And I think if you put those two together then it evens out a lot. But the returns are just kind of hard to hard to fathom And I think mentioning those other bubbles people look back and go, oh jeez. This is one of those because if you just look at history, when you have these types of crazy returns and you have the innovation that we've had, the excesses always get taken too far, everythingthing swings in one direction and then it swings the other way and like this is one of those things. So everyone, of course, is now trying to say, all right The Nazak is in a bubble. this is just like nineteen ninety nine. You see those comparisons on a daily basis now You've got a really good piece about this asking the question is A I another bubble Like what did you find in terms of the differences here So there's a lot of differences. I mean, you guys mentioned it, you know early on that you know for investors, fundamentals are the thing that matter the most in the long term. And that is a big part of the story that we tell every single day, which is if you condensed down the NASA one hundred sort of pitch to a ten second elevator pitch The way I explain it to investors is in the twenty first century, innovation is what disproportionately drives growth, whether you're a company whether you're a sector, whether you're entire economy. Sustainable innovation driven growth is what drives longer term fundamental outcomes, preferable fundamental outcomes And that's over the long term, how you get equity market outperformance. So when you look A the last twenty years, right? You gave some stats of your own in terms of annualized performance Last twenty years annualized performance is around fifteen percent a year. Earnings have been compounding at about fifteen percent a year on this index for the last twenty years Right? So when you when you benchmarket against what the fundamental growth has been actuallyctually, you know, depending on the day couple weeks ago, you know, when we were still quite a bit lower in the markets more generally Depending on the day we're actually trading at a lower PE than we were in the mid two thousands So way you said fif percent fifteen percent earnings growth for the past twenty years Poice jokes Wow. Yeah Look at the PE today and it's like, okay, people are always going to cherry pick whatever number suits their story and they'll cite a PE in the mid thirties on a trailing basis and say that's expensive Historically We just had we're on track for forty five percent year of year EPS growth on the index this quarter U For the full year, it's going to be probably north of thirty percent. So when you look on a forward basis, the PE is only around twenty six When you looked at the forward PEs back in the late nineties, they were at one hundred or even higher U you know, some of the math gets a little bit tricky because not all the data is still there for all the companies that don't exist anymore But it's a totally different story. It's almost like a reverse, you know, it's like a mirror image where where you look at The entirety of the index, right? Most of the index was at what you would consider a really expensive PE fifty six year' even over that Nine out of the top ten names were at a PE of a hundred or more. Today, it's the exact opposite. Most of the names are like under forty PE nine of the top ten names are within something that's very reasonable. Tesla's the one outlier. They've always been an outlier in terms of being able to sell. their particular story and their brand to their investor base and maintain that high valuation U, But it's very different from whatever perspective you take, whether it's valuation, whether it's earnings growth, whether it's cash flow Um the size of the companies, right? Like if you were to and I'm not saying this can't happen But if you were to forecast a repeat, of the early two thousands at an eighty two percent drawdown, whatever it was on the NASDAQ one hundred to happen again today The NazQ one hundred today is more than fifty percent of the S and P five hundred. Back then it was like, ten to fifteen percent depending on the day. So you would have a completely different market reaction to an eighty percent plus Coapse at EPS and an accompanying eighty percent plus collapse in The most fundamentally sound, fastest growing, most stable part of the market U when you look at a lot of the companies that sort of form the backbone of the NASAQ one hundred and, you know, the next year beyond that as well. It's just very, very, very different market environment, I think Mark, I think you'd have to be you'd have to be very dense to not at least appreciate some of the comparisons to the dot com bubble. But I think you'd have to be an idiot. to suggest that this is the same thing because it just fundamentally is not. Is there excessive enthusiasm around tech Yeah, is that sort of around where it stops and starts in my opinion I believe so. So You have a great slide comparing the the net margins in nineteen ninety nine and the net margins today twentyw percent of the index today has a net margin, a net Margin betweenet fifty and one hundred percent. You had zero companies in that bucket in nineteen ninety nine fifty percent or just over fifty percent are between today have margins between twenty five and fifty percent. Back then, it was half of that So you ask, all right, well where Did the nineteen ninety nine Margins fall, mostly Here's where they fell forty three percent of the index. had margins between ten percent and twenty five percent Not great. Another twenty one was between zero and ten percent, that compares to less than nine percent today And ten percent of the index was negative in terms of their margins. So yes, Ciskco And inntel and Oracle and Qualcom, you know, obviously did amazing things and were great companies in their own right But at the index level, there was a lot of garbage and the valuations of these garbage companies, not all of them. We're through the roof The valuations today look much more reasonable. now maybe a fair counterpoint is that, well, all right If Nvidia had a premium multiple, there would be twenty five percent of the index. for fair, point taken. a lot of differences, a lot of you know, some similarities But when when you look under the hood into the fundamentals and forget about the anecdotes, and the anecdotes don't do not, well I guess people are trreating today too. Maybe not to the same extent. Anyway, I don't think this is nineteen eighty nine If anything's nineteen ninety eight I like this chart in here on the P bucket. So you the PE you show in In ninety nine L looks like I don't know, eyeballings seenty five percent or so of the companies are trading at a P year sixty or higher. and today it's less than twenty percent. Yeah, come on So yeah, you're right. the if you look at on a whole, it's it's It's much different I guess you maybe where you where probably Michael and I would foall like the boring answer would be like, of course, you're not going to compound at twenty two percent per year going forward. That can't continue forever unless earnings keep going up as much as they have So it has to, like you said, it's got to be a fundamental thing to keep this train going, potentially Yeah, I mean, look, I'm not in the business of issuing forecasts, although, you know, we look at as much data on my team as possible to try to sort of understand some of these historical parallels and understand you know, if you are going to make a forecast, what what are the ways that you can go about doing it? right? You can look at what's the entirety of the seellside community saying for each and every single company? Right and sort of weight that according to their position in the index and say, okay, here's a forecast based on what analysts think bottom up. you could look at something like you know, the regression of index performance against forward EPS growth over several decades, which we have, right? And that tends to be a pretty good estimator becausecause again, over the long run, that's what we see. We see fifteen percent or so annualized performance fifteen percent compounded EPS growth over over two decades, pretty much now. right? And so if you are looking out and you're seeing, We're expecting twenty, thirty percent earnings growth on the index over the next year. We're on track to deliver forty five percent this quarter It's hard to be very bearish in those types of dichotomies where like on the one hand, everything on paper is telling you looks great and on the other You have this historical analog in your head and you're trying to make it fit And of course, it's never going to be a perfect fit, but like you said, there are similarities, right? There's massively new disruptive tech now in AI that's massively concentrated in this index And it's sort of you know, all the intricacies of how the companies are approaching the investment towards that technology and the benefits that they're getting from it, that to me is the much more interesting conversation to have as opposed to like, oh, hey, You know, where we're already up this much. There's a new technology. that means it's a bubble, that means sell That's that's not to me, that's not that interesting of a story Mark, maybe we could close here. You guys have a triple Q M whichich was launched in I believe this looks like what twenty sometime in twenty twenty twenty twenty sounds right. Yeah. Okay. end of twenty twenty And it's it's the NASA one hundred, It's another NASA one hundred ETF. Um It is a lower What's the difference? Is it a lower price version? orr what exactly is a difference? If you recall reading some of those articles about the triple Q proxy process that went on last year with Investco, That was fun for shareholders Given that was that was yeah, that was sounded like it was not so fun for a lot of people, right? huge investor base, right that built up over twenty five plus years U fun fact, by the way NSDAq was the original owner of the Ques We only transferred it to Power Shares, which was a predecessor company of Inesco several years after the fact. but we were the initial creator and owner of it. and as part of the way that the fund was structured, it was a UIT. It wasn't a pure ETF in the way that ETX was structured today. It had these special rules in place in terms of certain amount of money must go to the index you know, the index administrator certain amount has to go to the market administrator, the custodian and the rest has to go to marketing. That's why you saw the ads every March Madness, you know, like on on infinite loop, right You didn't see that so much this year. That's changed. That's part of the process that Now Inesco having gotten these rules to be approved is able to retain a lot of that expense ratio on the cues, which they lowered from twenty bibbss to eighteen. They launched QQM years ago to try to capture some of that and say, hey, here's a slightly cheaper fifteen Bs version of the cues that is meant to be more of a longer term buy and hold vehicle. There' a little few different things that they're able to do there u that are that are a little bit different day to day managing the fund, but That's been a great, obviously very successful product. Its It's at ninety billionars already. Yeah. It's may eleventh we're recording it, it's ninety billion dollars in assets. So Oh my Godd, on behalf of investors everywhere. Let's hope this one point four trillion dollars keeps going up until the right. It's been an incredible ride I don't think anybody could have foreseen the success, but it it's, you know, It all comes down to back to the businesses If Apple and Amazon and all the other monster constituents weren't growing at the insane rates. I think Google just beat their estimates by ninety percent. I mean, it's a joke at this point. If they weren't doing what they were doing, the stock prices would not reflect the reality on the ground. So Mark, for people that want to learn more about some of the amazing research reports that you guys are putting out, we'll ent in the showes, of course, but where can we send them seend them to NASAak. com and have them start looking for, you know, the NASAC one hundred landing page. Research and insights. We got a QR code that we can hopefully display at some point Do an easy sign up and you'll see more of us, hopefully in the future. Awesome. Thanks Mark Thank you Okay, thank you to Mark. or check out nazaq. com to learn more. Check out our show notes for all these great charts for Mark's research and email us animal spirits at compompoundneews. com