Question

1. Evaluating ETF performance. Do an online search for information on the Powershares QQQ Exchange Trade Fund (ETF). Discuss what information you need to evaluate the performance of the ETF, and use what you find to evaluate the QQQ ETF. What kind of investor should invest in this ETF?

Answer 1

ETF’s performance can be judged and evaluated by determining its efficiency. The efficiency of an ETF depends on its expenses, its fees and capital gains distributions. We should start with the expense ratio of the fund. Also we will have to determine how well the ETF replicates the performance of its index. Next we will have to evaluate its fees and the lower the fees the better. The measure that can be used is ‘tracking difference’. This looks at how an ETF has lagged a benchmark.

Powershares QQQ Exchange Trade Fund tracks the Nasdaq 100 index. Thus the Powershares QQQ Exchange Trade Fund is largely weighed towards large-cap technology companies. The expense ratio of this fund is 0.20% and the median tracking difference for this fund is -0.28%. This makes the fund quite attractive.

Investors with a large appetite for risk and a non-conservative approach to investment should invest in Powershares QQQ Exchange Trade Fund. This is because the fund invests mainly in technology stocks and hence the risk factor is high (but so are the probable returns). The fund is skewed away from a broad-based large-cap portfolio and hence has a unique investment profile.