A market rotation is occurring, providing ballast to some cyclical and defensive sectors. Meanwhile, it highlights departures from previously beloved groups such as technology. Those are the breaks when a slew of software stocks tumble on artificial intelligence (AI) fears and geopolitical concerns boost energy and commodities prices, among other factors. That doesn’t mean that investors should forsake growth sectors in wholesale fashion. However, there’s now a premium on that access. With that in mind, the NEOS Nasdaq 100 High Income ETF (QQQI) may be an example of an ETF right for these times.
As an options-based, income-generating ETF, QQQI has the ability to capture some of the upside in the Nasdaq 100 Index in a rebound scenario. Indeed, some experts now view the technology and consumer discretionary sectors as undervalued. Those groups combine for nearly 82% of the Nasdaq 100’s weight.
QQQI Pays Investors to Wait
For some investors, waiting on tech stocks to get their grooves back is a quagmire. After all, the sector and related traditional ETFs sport low yields. QQQI improves that scenario in significant fashion with a distribution rate of 14.30%, confirming there’s compensation involved for those willing to tempt fate with tech’s now reduced valuations.
“The sector has seen a notable shift toward lower valuations over the past year,” noted Morningstar’s Rachel Schlueter. “At present, 26.03% of all undervalued stocks with Morningstar’s coverage fall within tech, up from 8.91% a year ago and 17.33% just three months ago. In the face of price volatility, two-thirds of today’s undervalued tech stocks are in the software industry.”
Something else adds to the allure of QQQI as an income/valuation play. Some marquee names in the Nasdaq 100, such as Adobe (ADBE) and Facebook parent Meta Platforms (META), are seen as undervalued.
“Mega-cap companies like Meta Platforms are also driving undervaluation in the communications sector, which accounts for 8.9% of today’s undervalued stocks. Like software companies, Meta plans for significant AI-related spending this year,” added Schlueter.
In an odd twist of fate, QQQI’s relationship to an index normally known for being home to richly valued stocks could work in investors’ favor. Many of the sectors that are now overvalued are lightly represented in the Nasdaq 100.
“As value-leaning sectors’ returns have surged this year, their valuations have climbed. As a result, the industrials sector is home to 26.85% of today’s overvalued stocks, up almost 10% since last February and currently the most of any sector,” concluded Schlueter.
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