The popular QQQ ETF may undergo a structural change.
Invesco (NYSE:IVZ) stock is on the move, rising some 5% on Tuesday to about $21 per share.
The asset management firm, which is one of the five largest managers of exchange-traded funds (ETFs), saw its stock price jump despite mixed second quarter earnings results.
In a quarter that saw the Nasdaq jump almost 17%, Invesco got a major revenue boost from rising asset levels considering its flagship fund is the Invesco QQQ ETF.
The Invesco QQQ, which tracks the Nasdaq 100, is one of the largest and most popular ETFs. In the second quarter, the QQQ ETF saw its assets under management jump 19% to $353 billion, making it one of the five largest ETFs in the world.
Overall, Invesco saw its assets under management jump 8.5% in the quarter to a record $2 trillion. It had $15.6 billion in net inflows into its funds with retail accounting for $9.1 billion and institutional making up $6.5 billion in inflows. That was down from $16.7 billion in net inflows in Q2 of 2024.
It translated into 2.2% growth in revenue to $1.5 billion, which easily topped estimates of $1.1 billion.
However, the firm had a net loss of $12.5 million in the quarter, down from a $171 million net gain in the same quarter a year ago. But that was due in large part to a $159 million loss on costs related to the company repurchasing $1.0 billion of the company’s outstanding Series A Preferred Stock held by MassMutual.
Minus those costs, adjusted net income was $165 million, or 36 cents per share, which was down 18% year-over-year and below estimates of 40 cents per share.
“Strengthening our balance sheet and returning capital to shareholders is a top priority for Invesco,” Andrew Schlossberg, Invesco president and CEO, said.
Game changer for the QQQ
While Invesco is one of the best ETF fund families, the QQQ is by far its biggest and most successful brand.
Few ETFs can match the QQQ’s track record, as it has generated average annualized returns of 16.3% over the past five years and 17.3% over the past 10 years.
It has been good to Invesco stock investors, and it could get better as the company is making a change to the QQQ that would result in more revenue for the firm.
Last week, Invesco filed papers with the Securities and Exchange Commission (SEC) to change the operational structure of the QQQ from its current unit investment trust to an open-ended ETF. Most ETFs are open-ended, so it is not something unusual.
On the Q2 earnings call, Invesco CFO Allison Duke explained how the change could boost Invesco’s revenue.
“Of the 20-basis point fee, eight basis points is for the licensing fee, eight basis points is for marketing expenses, and four basis points is the trustee fee,” Duke said. So, under the current unit investment trust structure, Invesco earns the eight-basis point marketing fee, but the rest goes to third parties.
Under the new open-ended structure, Invesco would get a higher percentage of the fees, about a four-basis point benefit, said Duke. It still needs to be approved by regulators, which officials said could happen in the fourth quarter.
Analysts at TD Cowen called this a “game changing event” for Invesco that will lead to earnings accretion. TD Cowen upgraded Invesco stock to a buy because of this with a target of $25, up from $17.50.
Barclays analysts said it could result in $140 million in incremental revenue for Invesco, according to Trefis, with the bulk of it coming in as pure profit.
Invesco stock has a median price target of $17 per share, which is some 20% below the current price. But this change bears watching as it certainly could provide some alpha for Invesco stock if it goes through.
