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For years, quantum computing has been something considered revolutionary, but out of reach up until recently. The introduction of Google's Willow chip, which took a complex problem that would have taken traditional computers an estimated 10 septillion years to complete and finished it in about five minutes. If this chip becomes practical and stable at any point in the near future, we could be looking at huge advances in everything from medicine to scientific research to mathematics to exploration.

As is often the case, the ETF industry offers the opportunity to invest in this theme. The Defiance Quantum ETF (QTUM) has actually been around since 2018, although it's mostly languished under the radar. Its performance has been solid, roughly matching that of the Nasdaq 100 over time despite its heavy tilt towards smaller companies.

At the start of the year, QTUM had about $200 million in assets. As of today (and mostly having occurred in just the past few weeks), QTUM has ballooned to around $500 million in assets. Average trading volume has gone from around 30,000 shares daily to more than 200,000.

In the case of thematic ETFs, such as QTUM, the methodology is ultra-important. Some ETFs will apply very loose criteria, such as requiring only minimal exposure to a theme and then market cap weighting the qualifying components. Situations like that usually result in just a bland large-cap portfolio that is far from a pure play on the theme.

QTUM is actually pretty well-structured. Its selection criteria is more stringent and, while there are relatively few pure plays in the quantum computing space, this fund does a good job of providing as much targeted exposure as possible.

What Is The Defiance Quantum ETF?

QTUM tracks the BlueStar Machine Learning & Quantum Computing Index, a thematic index tracking the performance of companies involved in industries related to quantum computing or machine learning.

After applying some basic liquidity and tradeability screens, the index includes companies whose business activity, products, or services include one of the following in relation to the development or commercialization of quantum computing or machine learning technology:

Quantum Computing

• super conducting materials

• applications or algorithms built for quantum computers

• equipment and materials used specifically in the manufacturing of quantum computers.

Machine Learning

• advanced computing hardware (such as GPUs, FPGAs, ASICs, and other embedded artificial intelligence chips)

• semiconductor manufacturing equipment

• companies that specialize in the perception, collection, visualization, or management of big data.

All securities that meet the eligibility criteria and have at least 50% of their annual revenues or operating activity from quantum computing-related products or activities will be selected.

The index aims to hold a minimum of 70 components, which are equal-weighted at every rebalance.

What Does QTUM Look Like?

What qualifies as quantum computing or machine learning revenue is subjective. If you look through the list of QTUM's qualifying names, you'll find Google, NVIDIA, IBM, Taiwan Semiconductor, Microsoft, Micron Technology and even Alibaba. These companies are obviously investing a lot of money in the development of AI and its derivative technologies, but they're clearly not pure quantum computing plays.

The equal weight methodology, however, minimizes their impact and helps give greater importance to smaller companies and those who are more directly exposed to the theme. This is the preferable way to construct an index for a theme like this.

Most of the portfolio, obviously, is tech. Only half of the portfolio, however, is in large-caps and only 2/3 of assets are invested in U.S. companies. This kind of global, all-cap composition is ideal because it captures the technology no matter where it's developed and who's developing it.

Because the fund's index is only rebalanced and reconstituted every six months, there's a strong momentum factor here as well. Winners are allowed to run, although it can create some significant deviations from the original equal weighting.

With an estimated 70 holdings at any given time, each stock at the time of rebalance would receive a weighting of about 1.4%. Recently, several stocks have rallied hard, giving the portfolio a bit of temporary top-heaviness.

A momentum tilt is probably the way you want to play this theme. Sentiment can change very quickly and very strongly. You don't necessarily want to be rotating in and out of these names quickly if you want to try to maximize your upside capture. Using an inherent momentum strategy in a high tech investment strategy makes sense.

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What Makes QTUM A Top Pick For 2025?

We've only recently seen what's happened with the AI trade. Since the beginning of 2023, NVIDIA is up 800%. The magnificent 7 collectively is up around 140% over the same time frame. When a new technology captures the imagination of investors, there's almost no limit to what they'll do to capture a piece of it.

Is quantum computing the next big technological theme? Well, AI is still very much developing, but quantum computing should be ready to ride the theme. There's been a huge rally in the AI-adjacent names already, so perhaps that limits some upside, but the fact that this gives outsized exposure to both small- and micro-cap companies suggests there's still a lot of upside to be had.

QTUM is "only" up 53% year-to-date, but more than half of that gain has come just in the past few weeks. It only surpassed the Nasdaq 100's year-to-date performance around Thanksgiving, so we could still be very early in this cycle. Given how we've seen investors react to AI plays, I think we could see a similar reaction to quantum computing names, even if some of them happen to overlap.

As long as Google's Willow chip remains in the news cycle, QTUM could remain in favor for a while.

Final Thoughts

I don't like making predictions for huge returns because they're rarely correct and they're usually more hype than anything.

I'm going to make an exception for QTUM though. I wouldn't at all be surprised to see this ETF produce a triple-digit return in 2025. Obviously, a lot would have to go right and it would require the avoidance of recession, high inflation, geopolitical blowups and just about any other tail risk to make it happen, but I do think it's a possibility under the right set of conditions.