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This is a level 2 question.
I have recently heard about QQQQ and SPY. Can you explain what these are and how they work?
The Powershares QQQ Trust, also called the Nasdaq-100 Trust, (symbol QQQQ) is an innovative index product designed to cater to American and overseas investors. The QQQQ follows in the footsteps of those established earlier by the Dow Jones Industrial's Diamonds (DIA) and the Standard & Poor's Depositary Receipts (also known as SPDR or "Spiders," symbol SPY) index-based products. All 3 effectively work the same except that they reflect different stock benchmarks.
All 3 allow investors to buy or sell shares in an entire portfolio. The Diamonds (DIA) allow investors to buy or sell through a single transaction the entire Dow Jones Industrials Average. The SPDR (SPY) or "Spider" allows an investor to buy or sell the entire portfolio of the 500 stocks of the S&P 500 in a single transaction as easily as you buy or sell shares of a stock. The QQQQ does the same as the above two except it allows you to perform the single buy or sell transaction on its Nasdaq 100 companies index.
All 3 trusts can be bought or sold through a broker throughout the day on the Nasdaq-Amex. With all 3 you can buy or sell shares in the collective performance of that particular benchmark index in a single transaction — just as you do for individual shares. There is no waiting until the end of the day for the price to be determined as in the case of most mutual funds. The beauty of these unit trust shares is that 1 investment gives you ownership in the stocks of the Dow Jones Industrials, the S&P 500, or the Nasdaq 100 companies, depending upon on which benchmark you decide to buy.
The DIAs, SPDRs and QQQQs all can be bought on margin, sold short or held for the long term. When you purchase these unit shares you're investing in a unit trust that holds the shares of the companies that are represented by that particular index. The trust is designed to closely track the price and yield performance of that particular index, so you can expect your particular index trust to move up and down in value with the index itself.
The QQQQ are priced approximately 1/20 the value of the Nasdaq 100 Index (NDX), the DIA are approximately 1/100 of the Dow Jones Industrials (DJIA) index value, while the SPDRs are approximately 1/10 of the value of the S&P 500 index (SPX).
The pricing of all 3 unit trust shares is continuous, subject to any trading halts during trading hours. That means that you can obtain continuous up to the minute share prices whenever the market is open. These three investment trust shares allow you to meet important investment objectives such as diversification by allowing you to invest in the performance of those 3 index benchmarks. In the case of the QQQQ, the portfolio of stocks would include companies in such industries as computer hardware and software, telecommunications, retail/wholesale trade and biotechnology.
Because all 3 unit trust shares reflect the collective performance of the companies that they represent, the impact of price fluctuations caused by a specific stock will be reduced. If you are investing for the long term, you can hold on for a very long time. In the case of the QQQQ, the trust has a 125-year term, subject to early termination events. If you're a more active investor, you can take advantage of market rallies and sell-offs by buying and selling those shares at any time during market hours.
The portfolios of all 3 unit trusts are held and are not actively managed, which means the trust does not try to outperform their benchmarks on which they are assembled, but instead just tracks it. Because this tracking requires less costly trading and less portfolio turnover than an actively managed portfolio, costs on the unit trusts shares are lower than on conventional funds that are actively managed.
Because all 3 unit trusts are designed to closely track their respective indexes it is less likely that they will create potentially high capital gains distributions like an actively managed portfolio. The trust will generally sell securities only to reflect changes in the composition of the index and to pay trust expenses.
In the case of dividends, the unit trusts can pay quarterly cash dividends representing dividends accumulated on the stocks that they hold if those stocks pay dividends. However, certain fees and other expenses will be deducted.
Important Unit Trust Investor Advantages
- A one-investment portfolio. A personal portfolio of 30 Dow Jones Industrial blue-chip stocks, 500 S&P stocks, or 100 Nasdaq stocks, which can be bought or sold throughout the day. The process is as easy and as familiar as purchasing shares of a single stock.
- Long-term performance. Buy, sell or hold. Investing for the long term, all three unit trusts can be held throughout the life of the Trust that extends into the 22nd century. Of course, investors can initiate and close out their index trust shares by trading on the Nasdaq-American Stock Exchange.
- The opportunity for dividends. It's another important advantage. Diamond holdings pay monthly dividend amounts of cash corresponding to the cash dividends that accrue to the portfolio of DJIA stocks in the Trust, less fees and expenses of the Trust. In addition, there are opportunities for dividend reinvestment.
- Stock selection without the homework. Investing in the unit trust shares means investing in securities that track the already selected DJIA, S&P 500, and the Nasdaq 100 stock leaders in their respective industries, all widely held by individuals and institutions.
- The convenience of investing in 30, 100, or 500 leading stocks is not very practical for many individual investors. Investors face not only expensive transaction costs, but also the difficulty associated with buying all of the stocks simultaneously. All of that has changed with these unit trust shares.
- Diversification. These unit trust shares provide the opportunity to meet an important investment objective - diversification. Although still subject to market fluctuations, through diversification investors can generally reduce the impact of price fluctuations caused by specific company and even industry developments.
- Investment affordability. All 3 unit trusts were designed with the objective of providing a security at a fractional size of the market value of the underlying index's value. Trust shares' costs are anticipated to be among the lowest for investments of this type because of the absence of high management and sponsor fees.
- Market Adaptability. In a bull or a bear market, aggressive or conservative, unit trust shares can enhance an investor's investment goals.
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Question Level Key
Level One--Basic Jargon, Definitions, Basic Mechanics of Trading.
Level Two--Introductory Points, Practical Points and Simple Strategies
Level Three--More Advanced Strategies and Repairs
Level Four--Risk Management, Psychology, and How Best to Evaluate Things.
Level Five--High end questions concerning Portfolio Analysis, Managing a Portfolio
of Options, Option Pricing Models, and Nuances of Trading. Included could be a variety of
other topics.
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