The massive danger lurking in U.S. index funds proper now is just not some secret scandal. It’s plain outdated focus, dressed up in a really costly go well with. An enormous slice of fashionable U.S. indexes now rides on a small group of mega-cap tech names, many tied to the factitious intelligence (AI) commerce. If these few names stumble, the entire “diversified” index can really feel quite a bit much less diversified.
The second layer of danger hits Canadians particularly. Forex swings and hedging selections can change your expertise even when the underlying U.S. market does precisely what you anticipated. Put it collectively and also you get an index fund that may look calm on paper, then punch more durable than you needed when sentiment flips. So, what ought to buyers do?
Contemplate an ETF
The BMO Nasdaq 100 Fairness Hedged to CAD Index ETF (TSX:ZQQ) offers you focused publicity to the Nasdaq-100whereas attempting to easy out the CAD/USD trip. It goals to copy the efficiency of the NASDAQ-100 Index hedged to Canadian {dollars}, internet of charges, and it holds 100 of the most important non-financial corporations listed on Nasdaq. That “non-financial” element issues because it naturally pushes the portfolio towards expertise, communication providers, and client manufacturers, not banks.
Tech and AI-linked mega caps continued to dominate the dialog, and ZQQ merely mirrored that. The ETF’s high 10 holdings included Nvidia, Apple, Microsoft, Alphabet, Broadcomand Amazonand the highest 10 made up 55.7% of the portfolio. That’s the focus danger in a single clear quantity. When greater than half your fund sits in 10 corporations, the phrase “index” doesn’t mechanically imply “protected.”
The “hedged to CAD” half additionally deserves actual respect, because it adjustments what you’re shopping for. ZQQ tries to reduce foreign-currency fluctuations relative to the Canadian greenback. That may assist if the loonie strengthens, as unhedged U.S. funds can lose worth in CAD phrases even when U.S. shares rise. However hedging may also uninteresting beneficial properties when the loonie weakens, as a result of unhedged buyers get a forex tailwind. Hedging additionally provides its personal transferring elements via derivatives and rolling contracts, which might create monitoring variations versus a plain, unhedged index expertise.
Numbers don’t lie
Now take a look at the latest numbers, as a result of they inform you how this product behaves when the market adjustments tone. Whole worth sat at about $2.8 billion on the time of writing, with a administration expense ratio (MER) of 0.39%. It additionally confirmed the danger score as medium to excessive. That score matches the truth of a concentrated growth-heavy index. It could actually rip larger, however may also drop quick.
Efficiency historical past makes the purpose with none drama. Whereas the start of 2025 noticed a significant drop, the ETF surged again, and is now up about 10% within the final yr alone. In the meantime, it has been secure year-to-date. That’s not a “set it and neglect it” fund. It’s a “set it and maintain on” fund.
The longer term outlook comes down as to whether the identical winners can maintain delivering. ZQQ will seemingly maintain benefiting if AI spending stays sturdy and the largest platform corporations maintain compounding earnings. The flip facet sits in the identical place. If the market decides these mega caps look too expensive, or if regulation, competitors, or a slowdown hits the narrative, the focus can amplify the ache.
Backside line
So might ZQQ be a purchase amid the massive danger lurking in U.S. index funds? It might, if you’d like purposeful publicity to U.S. progress leaders and you’ll abdomen medium-to-high volatility with out panic-selling. It could actually additionally make sense when you desire to scale back CAD/USD noise inside a Tax-Free Financial savings Account (TFSA), the place you need the return to return primarily from the businesses, not the forex.
The explanations it may not be a purchase are simply as clear. The fund concentrates closely in a handful of mega caps, and it may drop exhausting when progress falls out of favour. If you happen to can not maintain via a pointy drawdown, this isn’t the place to practise braveness.