Posted on 12/16/2011
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 new product from RBS Securities, which was just launched yesterday. 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 provided a comparative analysis of the annual performance for both the QQQ and the TNDQ. Notice how cumulatively (since 2000), the TNDQ is up more than 25%, while the QQQ is down nearly -40%. This outperformance on a cumulative basis can be attributed to sizable outperformances from the TNDQ during bear markets provided by 2000, 2001, 2002, and 2008. Additionally, in strong bull markets such as 2009, the TNQD is able to keep pace with the QQQ with a discrepancy of less than a 1% in performance that year. Notice how the magnitude of outperformance on average for the TNQD is much greater than the magnitude of underperformance. In short, you will benefit from the defensive mechanisms within the TNQD during down market, but it is likely to fall short during choppy, trendless markets like today's.
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