Buying Nasdaq Next Gen 100: The 'Smaller' Nasdaq ETF

It looks to me as if the FANMAGs are getting tired. For the last few weeks, they have moved ever more slowly on up days and gotten the worst of it on down days.

These rotations tend to be subtle at first. That’s good for those willing to see it not as an anomaly but as the possible beginning of a trend. The indicators I use tell me big money is starting to rotate out of the large caps and into the next level down. We can still position ourselves while these are fairly priced.

I'm seeing ample evidence of a rotation into small- and mid cap firms. These are two areas I'm moving slowly and steadily into. Here's a third – something that's still large but not Titanic (and we all know what happened to "that" supposedly unsinkable vessel.)

By owning the Nasdaq Next Gen ETF (Nasdaq:QQQJ), we are not abandoning large caps wholesale. We are, however, recognizing that a recovering economy will lift more boats than just those biggest companies. In most cases, these “smaller” firms have farther to rise.

Tesla (Nasdaq:TSLA) being put into the S&P 500 will provide momentary respite as every mutual fund and ETF that indexes will have to sell off other holdings in order to add Tesla to stay consistent to the “new! improved!” (or maybe not) S&P 500 index. But for maximum gain, I believe it's time to visit the next level down.

Here are the top 10 holdings of QQQJ – numbers 101 to 110 on the Nasdaq in terms of market capitalization:

Source: Fidelity.com

Not exactly a bunch of also-rans! These are companies many investors already know. Please note that the disparity between the percentage holdings between No. 1 and No. 10 of QQQJ, the "second tier" of the Nasdaq, is quite slight. I really like that. It makes this ETF closer to an equal weight. For comparison, in the Nasdaq 100 ETF (QQQ), No. 1 holding Apple (Nasdaq:AAPL) is 13% of the portfolio; No. 10 Adobe (Nasdaq:ADBE) is less than 2%.

With the certainty that only hindsight can deliver, the Nasdaq 100 has been the place to be during this recovery from the worst fears in late March. It has delivered well. I believe the next tier down will deliver more profits going forward, however.

As you might imagine, this ETF still has some large cap issues, but it's primarily a mid-cap offering:

Source: Fidelity.com

Finally, the sector and industry exposure is, as you would imagine, still heavily into tech. That’s a good thing. However, in the Nasdaq 100, healthcare gets a scant 6.15% share. In the Nasdaq Next Gen 100 it's nearly three times that.

Source: Fidelity.com

I think the Nasdaq Next Gen 100 deserves a place in our portfolio. I purchased it for myself, clients for whom it's appropriate, and our Growth & Value portfolio on Investors Edge® last week. Thanks to this week’s choppy markets, today it can be bought for within a penny or two of the price we paid.