Posted on 03/27/2012
As many of you are aware, the QQQ tracks the NASDAQ-100 Index (NDX), which is comprised of the largest 100 stocks (excluding financials) that trade on the NASDAQ. As of late, this is an area of the market that has done particularly well compared to others; however, that certainly has not always been the case and will likely not prove to be the case indefinitely moving forward. One way to gain more defensive exposure to these 100 stocks is through a product from RBS Securities, which is the RBS NASDAQ-100® Trendpilot™ ETN (TNDQ).
The TNDQ seeks exposure to the NASDAQ-100 when the time is right, while moving to cash when it is not. How does it attempt to accomplish this? Well, the fund tracks the performance of the RBS NASDAQ-100® Trendpilot™ Index, which switches its investment between the NASDAQ-100® Total Return IndexSM or the cash rate (as determined by the current yield on 3-month US Treasury bills) based on simple moving average calculations. Specifically, the ETN uses the 100-day Moving Average for the NDX to determine which investment to make. If the index is above its 100-day moving average, it will invest in the NASDAQ-100, and will remain in that allocation until the index spends a consecutive 5 days below its 100-day moving average, at which point it switches to "cash".
The objective here is to provide downside protection within a single CUSIP product, when the index loses momentum. Below we have examined two different portfolios. If you were to invest $10,000 in TNDQ in July 1999, your portfolio would now be worth $23,965. On the other hand, if you were to invest the same $10,000 in QQQ, it would be worth $11,895 over the same time period. As you can see the graph below, in strong bull markets such as 2009, the TNDQ is able to keep pace with the QQQ while it is likely to fall short during choppy, trendless markets.