PowerShares QQQ Trust, Series 1
ANNUAL REPORT
SEPTEMBER 30, 2011
OBJECTIVE:
The PowerShares QQQ Trust, Series 1 (the "Trust") is a unit investment trust that issues securities called PowerShares QQQ Index Tracking Stock. The Trust holds all of the component securities of the Nasdaq-100 Index (the "Index"). The investment objective of the Trust is to provide investment results that generally correspond to the price and yield performance of the Nasdaq-100 Index (the component securities of the Index are sometimes referred to herein as "Index Securities"). There can be no assurance that this investment objective will be met fully.
PowerShares QQQ Trust, Series 1
Contents
Report of Independent Registered Public Accounting Firm | 1 | ||||||
Financial Statements | |||||||
Schedule of Investments | 2 | ||||||
Statement of Assets and Liabilities | 6 | ||||||
Statements of Operations | 7 | ||||||
Statements of Changes in Net Assets | 8 | ||||||
Financial Highlights | 9 | ||||||
Notes to Financial Statements | 10 | ||||||
Supplemental Information (Unaudited) | 17 | ||||||
This page has been left blank intentionally. | |||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Sponsor, Trustee and Unitholders of the PowerShares QQQ Trust, Series 1
We have audited the accompanying statement of assets and liabilities of PowerShares QQQ Trust, Series 1 (the "Trust"), including the schedule of investments, as of September 30, 2011, and the related statements of operations and changes in net assets for each of the three years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Trust's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2011 by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of PowerShares QQQ Trust, Series 1 at September 30, 2011, the results of its operations and the changes in its net assets for each of the three years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
January 11, 2012
1
PowerShares QQQ Trust, Series 1
Schedule of Investments
September 30, 2011
Common Stock | Shares | Value | |||||||||
Apple, Inc.* | 8,460,298 | $ | 3,224,896,392 | ||||||||
Microsoft Corp. | 76,466,678 | 1,903,255,615 | |||||||||
Oracle Corp. | 46,166,300 | 1,326,819,462 | |||||||||
Google, Inc., Class A* | 2,319,869 | 1,193,294,216 | |||||||||
Intel Corp. | 47,926,885 | 1,022,280,457 | |||||||||
Amazon.Com, Inc.* | 4,142,339 | 895,697,962 | |||||||||
Cisco Systems, Inc. | 50,194,819 | 777,517,746 | |||||||||
QUALCOMM, Inc. | 15,328,029 | 745,402,050 | |||||||||
Amgen, Inc. | 8,433,934 | 463,444,673 | |||||||||
Comcast Corp., Class A | 19,069,243 | 398,547,179 | |||||||||
eBay, Inc.* | 11,762,342 | 346,871,466 | |||||||||
Costco Wholesale Corp. | 3,995,313 | 328,095,104 | |||||||||
DIRECTV, Class A* | 6,741,218 | 284,816,460 | |||||||||
Gilead Sciences, Inc.* | 7,042,147 | 273,235,304 | |||||||||
Baidu, Inc. ADR* | 2,474,804 | 264,581,296 | |||||||||
Celgene Corp.* | 4,187,551 | 259,293,158 | |||||||||
News Corp., Class A | 16,685,658 | 258,127,129 | |||||||||
Starbucks Corp. | 6,809,383 | 253,921,892 | |||||||||
Teva Pharmaceutical Industries Ltd. ADR | 6,384,324 | 237,624,539 | |||||||||
Dell, Inc.* | 16,657,348 | 235,701,474 | |||||||||
Automatic Data Processing, Inc. | 4,469,993 | 210,760,170 | |||||||||
Vodafone Group PLC ADR | 8,197,728 | 210,271,723 | |||||||||
Biogen IDEC, Inc.* | 2,213,328 | 206,171,503 | |||||||||
priceline.com, Inc.* | 454,198 | 204,143,833 | |||||||||
Cognizant Technology Solutions Corp., Class A* | 2,771,249 | 173,757,312 | |||||||||
Express Scripts, Inc., Class A* | 4,460,419 | 165,347,732 | |||||||||
Yahoo!, Inc.* | 11,527,607 | 151,703,308 | |||||||||
Broadcom Corp., Class A* | 4,389,780 | 146,135,776 | |||||||||
Intuit, Inc.* | 2,774,092 | 131,602,924 | |||||||||
Wynn Resorts Ltd. | 1,140,319 | 131,227,911 | |||||||||
Bed Bath & Beyond, Inc.* | 2,274,764 | 130,366,725 | |||||||||
Intuitive Surgical, Inc.* | 356,706 | 129,940,862 | |||||||||
Green Mountain Coffee Roasters, Inc.* | 1,397,080 | 129,844,615 | |||||||||
Applied Materials, Inc. | 12,023,924 | 124,447,613 | |||||||||
Activision Blizzard, Inc. | 10,429,434 | 124,110,265 | |||||||||
NetApp, Inc.* | 3,397,902 | 115,324,794 | |||||||||
PACCAR, Inc. | 3,335,707 | 112,813,611 | |||||||||
Symantec Corp.* | 6,842,834 | 111,538,194 | |||||||||
Adobe Systems, Inc.* | 4,508,304 | 108,965,708 | |||||||||
Alexion Pharmaceuticals, Inc.* | 1,683,882 | 107,869,481 |
2
PowerShares QQQ Trust, Series 1
Schedule of Investments (continued)
September 30, 2011
Common Stock | Shares | Value | |||||||||
Cerner Corp.* | 1,542,711 | $ | 105,706,558 | ||||||||
Whole Foods Market, Inc. | 1,616,822 | 105,594,645 | |||||||||
CH Robinson Worldwide, Inc. | 1,505,030 | 103,049,404 | |||||||||
Check Point Software Technologies Ltd.* | 1,894,518 | 99,954,770 | |||||||||
Research In Motion Ltd.* | 4,754,947 | 96,525,424 | |||||||||
Citrix Systems, Inc.* | 1,718,273 | 93,697,427 | |||||||||
Altera Corp. | 2,956,615 | 93,222,071 | |||||||||
Fastenal Co. | 2,693,276 | 89,632,225 | |||||||||
CA, Inc. | 4,606,020 | 89,402,848 | |||||||||
SanDisk Corp.* | 2,183,060 | 88,086,471 | |||||||||
Paychex, Inc. | 3,309,775 | 87,278,767 | |||||||||
Staples, Inc. | 6,472,525 | 86,084,582 | |||||||||
Vertex Pharmaceuticals, Inc.* | 1,898,759 | 84,570,726 | |||||||||
Ross Stores, Inc. | 1,067,479 | 83,999,922 | |||||||||
Dollar Tree, Inc.* | 1,113,518 | 83,636,337 | |||||||||
O'reilly Automotive, Inc.* | 1,240,874 | 82,679,435 | |||||||||
Marvell Technology Group Ltd.* | 5,579,622 | 81,071,908 | |||||||||
Mattel, Inc. | 3,129,778 | 81,029,952 | |||||||||
Expeditors International of Washington, Inc. | 1,935,559 | 78,486,917 | |||||||||
Liberty Interactive Corp., Class A* | 5,226,274 | 77,192,067 | |||||||||
Virgin Media, Inc. | 2,868,573 | 69,849,753 | |||||||||
NVIDIA Corp.* | 5,509,176 | 68,864,700 | |||||||||
Sigma-Aldrich Corp. | 1,114,052 | 68,837,273 | |||||||||
Xilinx, Inc. | 2,419,916 | 66,402,495 | |||||||||
Mylan, Inc.* | 3,891,673 | 66,158,441 | |||||||||
Fiserv, Inc.* | 1,292,089 | 65,599,359 | |||||||||
Stericycle, Inc.* | 785,798 | 63,429,615 | |||||||||
Life Technologies Corp.* | 1,646,726 | 63,283,680 | |||||||||
Maxim Integrated Products, Inc. | 2,690,490 | 62,769,132 | |||||||||
BMC Software, Inc.* | 1,601,887 | 61,768,763 | |||||||||
Electronic Arts, Inc.* | 3,011,260 | 61,580,267 | |||||||||
Joy Global, Inc. | 958,520 | 59,792,478 | |||||||||
Expedia, Inc. | 2,269,099 | 58,429,299 | |||||||||
KLA-Tencor Corp. | 1,524,209 | 58,346,720 | |||||||||
Autodesk, Inc.* | 2,088,113 | 58,007,779 | |||||||||
Linear Technology Corp. | 2,079,871 | 57,508,433 | |||||||||
Garmin Ltd. | 1,772,961 | 56,326,971 | |||||||||
Sears Holdings Corp.* | 973,452 | 55,992,959 | |||||||||
Sirius XM Radio, Inc.* | 36,039,938 | 54,420,306 | |||||||||
NetFlix, Inc.* | 479,372 | 54,245,735 |
3
PowerShares QQQ Trust, Series 1
Schedule of Investments (continued)
September 30, 2011
Common Stock | Shares | Value | |||||||||
Microchip Technology, Inc. | 1,739,458 | $ | 54,114,538 | ||||||||
F5 Networks, Inc.* | 736,746 | 52,345,803 | |||||||||
Henry Schein, Inc.* | 843,303 | 52,293,219 | |||||||||
First Solar, Inc.* | 787,643 | 49,786,914 | |||||||||
Apollo Group, Inc., Class A* | 1,253,321 | 49,644,045 | |||||||||
Illumina, Inc.* | 1,134,570 | 46,426,604 | |||||||||
Micron Technology, Inc.* | 9,162,039 | 46,176,677 | |||||||||
VeriSign, Inc. | 1,518,820 | 43,453,440 | |||||||||
Ctrip.Com International Ltd. ADR* | 1,339,857 | 43,089,801 | |||||||||
Lam Research Corp.* | 1,129,710 | 42,906,386 | |||||||||
NII Holdings, Inc.* | 1,561,395 | 42,079,595 | |||||||||
DENTSPLY International, Inc. | 1,289,982 | 39,589,548 | |||||||||
Seagate Technology PLC | 3,830,070 | 39,373,120 | |||||||||
Infosys Technologies Ltd. ADR | 768,348 | 39,239,532 | |||||||||
Flextronics International Ltd.* | 6,678,852 | 37,601,937 | |||||||||
FLIR Systems, Inc. | 1,457,652 | 36,514,183 | |||||||||
Akamai Technologies, Inc.* | 1,682,893 | 33,455,913 | |||||||||
Warner Chilcott PLC, Class A* | 2,317,824 | 33,144,883 | |||||||||
Urban Outfitters, Inc.* | 1,438,086 | 32,098,080 | |||||||||
QIAGEN NV* | 2,134,595 | 29,521,449 | |||||||||
Total Investments (Cost $27,091,675,870) | $ | 21,485,139,915 |
* Non-income producing security for the year ended September 30, 2011.
ADR - American Depository Receipts
The securities of the PowerShares QQQ Trust, Series 1 (the "Trust") investment portfolio categorized by industry group, as a percentage of total investments at value, are as follows:
Industry Classification | Value | Percentage | |||||||||
Software | $ | 4,230,471,745 | 19.69 | % | |||||||
Computers | 3,973,664,987 | 18.49 | % | ||||||||
Internet | 3,222,371,236 | 15.00 | % | ||||||||
Semiconductors | 1,924,246,906 | 8.96 | % | ||||||||
Telecommunications | 1,634,849,144 | 7.61 | % | ||||||||
Biotechnology | 1,504,295,129 | 7.00 | % | ||||||||
Retail | 1,136,875,036 | 5.29 | % | ||||||||
Media | 995,911,074 | 4.64 | % | ||||||||
Commercial Services | 347,682,982 | 1.62 | % | ||||||||
Software & Computer Services | 303,820,828 | 1.41 | % |
4
PowerShares QQQ Trust, Series 1
Schedule of Investments (continued)
September 30, 2011
Industry Classification | Value | Percentage | |||||||||
Pharmaceuticals | $ | 264,651,056 | 1.23 | % | |||||||
Healthcare - Products | 251,345,078 | 1.17 | % | ||||||||
Pharmaceuticals & Biotechnology | 237,624,539 | 1.11 | % | ||||||||
Mobile Telecommunications | 210,271,723 | 0.98 | % | ||||||||
Transportation | 181,536,321 | 0.84 | % | ||||||||
Lodging | 131,227,911 | 0.61 | % | ||||||||
Electronics | 130,443,091 | 0.61 | % | ||||||||
Beverages | 129,844,615 | 0.60 | % | ||||||||
Auto Manufacturers | 112,813,611 | 0.52 | % | ||||||||
Food | 105,594,645 | 0.49 | % | ||||||||
Distribution / Wholesale | 89,632,225 | 0.42 | % | ||||||||
Toys / Games / Hobbies | 81,029,952 | 0.38 | % | ||||||||
Chemicals | 68,837,273 | 0.32 | % | ||||||||
Environmental Control | 63,429,615 | 0.30 | % | ||||||||
Machinery - Construction & Mining | 59,792,478 | 0.28 | % | ||||||||
Energy - Alternate Sources | 49,786,914 | 0.23 | % | ||||||||
Travel & Leisure | 43,089,801 | 0.20 | % | ||||||||
Total | $ | 21,485,139,915 | 100.00 | % |
Various inputs are used in determining the value of the Trust's investments. These inputs are summarized in the three broad levels listed below.
Level 1 - quoted prices in active markets for identical securities
Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 - significant unobservable inputs (including the Trust's own assumptions in determining the fair value of investments)
The following is a summary of the inputs used as of September 30, 2011 in valuing the Trust's assets carried at fair value:
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Investments in Securities | |||||||||||||||||||
Common Stocks | $ | 21,485,139,915 | †| $ | — | $ | — | $ | 21,485,139,915 | ||||||||||
Total | $ | 21,485,139,915 | $ | — | $ | — | $ | 21,485,139,915 |
†Please refer to the Industry Classification section of the Schedule of Investments for a breakdown of valuations by industry type.
5
PowerShares QQQ Trust, Series 1
Statement of Assets and Liabilities
September 30, 2011
Assets: | |||||||
Investments in securities, at value (cost $27,091,675,870) | $ | 21,485,139,915 | |||||
Cash | 34,336,522 | ||||||
Dividends receivable | 4,268,500 | ||||||
Receivable from units created | 1,212,540,923 | ||||||
Receivable from securities sold | 1,615,644,316 | ||||||
Total Assets | $ | 24,351,930,176 | |||||
Liabilities: | |||||||
Payable for securities purchased | $ | 1,212,498,581 | |||||
Distribution payable | 42,455,946 | ||||||
Payable to Sponsor | 8,183,413 | ||||||
Payable to Licensor | 5,131,168 | ||||||
Payable to Trustee | 1,132,786 | ||||||
Payable for units redeemed | 1,615,713,413 | ||||||
Accrued expenses | 492,616 | ||||||
Total Liabilities | 2,885,607,923 | ||||||
NET ASSETS | $ | 21,466,322,253 | |||||
Net Assets Represented By: | |||||||
Paid in capital | $ | 39,150,625,941 | |||||
Distributions in excess of net investment income | (10,760,269 | ) | |||||
Accumulated net realized loss on investments transactions | (12,067,007,464 | ) | |||||
Net unrealized depreciation of investments | (5,606,535,955 | ) | |||||
NET ASSETS | $ | 21,466,322,253 | |||||
Shares of beneficial interest outstanding, unlimited shares authorized: |
409,150,000 | ||||||
Net asset value per share: (net assets/shares of beneficial interest outstanding) |
$ | 52.47 |
See accompanying notes to financial statements.
6
PowerShares QQQ Trust, Series 1
Statements of Operations
Year Ended September 30, | |||||||||||||||
2011 | 2010 | 2009 | |||||||||||||
Investment income: | |||||||||||||||
Dividend income* | $ | 212,012,805 | $ | 158,868,271 | $ | 97,559,395 | |||||||||
Expenses: | |||||||||||||||
Trustee fees | 14,659,965 | 11,616,639 | 8,699,111 | ||||||||||||
Marketing expenses | 10,438,727 | 7,826,822 | 5,273,405 | ||||||||||||
Licensing fees | 21,112,705 | 16,524,739 | 12,169,883 | ||||||||||||
Professional fees | 125,852 | 151,440 | 193,965 | ||||||||||||
Other fees and expenses | 582,923 | 601,974 | 663,419 | ||||||||||||
Total expenses | 46,920,172 | 36,721,614 | 26,999,783 | ||||||||||||
Net investment income | 165,092,633 | 122,146,657 | 70,559,612 | ||||||||||||
Realized and unrealized gain (loss) on investments: |
|||||||||||||||
Net realized loss on sales of investments | (1,279,151,939 | ) | (685,126,878 | ) | (2,271,894,717 | ) | |||||||||
Net realized gain (loss) on in-kind redemptions |
3,458,504,565 | 1,761,323,868 | (437,040,122 | ) | |||||||||||
Net change in unrealized appreciation/depreciation of investments |
(1,136,960,877 | ) | 1,193,721,613 | 3,213,389,421 | |||||||||||
Net realized and unrealized gain on investments |
1,042,391,749 | 2,269,918,603 | 504,454,582 | ||||||||||||
Net increase in net assets resulting from operations |
$ | 1,207,484,382 | $ | 2,392,065,260 | $ | 575,014,194 |
* Net of foreign taxes withheld of $614,437, $1,908,734 and $840,309 for the years ended September 30, 2011, 2010 and 2009, respectively.
See accompanying notes to financial statements.
7
PowerShares QQQ Trust, Series 1
Statements of Changes in Net Assets
Year Ended September 30, | |||||||||||||||
2011 | 2010 | 2009 | |||||||||||||
Increase (Decrease) in Net Assets: | |||||||||||||||
Operations: | |||||||||||||||
Net investment income | $ | 165,092,633 | $ | 122,146,657 | $ | 70,559,612 | |||||||||
Net realized gain (loss) on investment transactions |
2,179,352,626 | 1,076,196,990 | (2,708,934,839 | ) | |||||||||||
Net change in unrealized appreciation/depreciation of investments |
(1,136,960,877 | ) | 1,193,721,613 | 3,213,389,421 | |||||||||||
Net increase in net assets resulting from operations |
1,207,484,382 | 2,392,065,260 | 575,014,194 | ||||||||||||
Distributions to Unitholders from: | |||||||||||||||
Net investment income | (166,193,995 | ) | (123,414,558 | ) | (71,964,054 | ) | |||||||||
Unitholder Transactions: | |||||||||||||||
Proceeds from subscriptions of PowerShares QQQ Index Tracking Stock shares |
75,758,226,422 | 68,071,023,844 | 48,301,844,499 | ||||||||||||
Less redemptions of PowerShares QQQ Index Tracking Stock shares |
(76,556,068,099 | ) | (66,210,692,758 | ) | (49,801,965,134 | ) | |||||||||
Increase (decrease) in net assets due to unitholder transactions |
(797,841,677 | ) | 1,860,331,086 | (1,500,120,635 | ) | ||||||||||
Total increase (decrease) | 243,448,710 | 4,128,981,788 | (997,070,495 | ) | |||||||||||
Net Assets: | |||||||||||||||
Beginning of year | 21,222,873,543 | 17,093,891,755 | 18,090,962,250 | ||||||||||||
End of year* | $ | 21,466,322,253 | $ | 21,222,873,543 | $ | 17,093,891,755 |
* Includes distributions in excess of net investment income of $(10,760,269), $(9,658,907) and $(8,391,006) at September 30, 2011, 2010 and 2009, respectively.
See accompanying notes to financial statements.
8
PowerShares QQQ Trust, Series 1
Financial Highlights
Year Ended September 30, | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||||||
Net Asset Value, beginning of year |
$ | 49.05 | $ | 42.29 | $ | 39.20 | $ | 51.41 | $ | 40.65 | |||||||||||||
Investment Operations: | |||||||||||||||||||||||
Net investment income(1) | 0.39 | 0.30 | 0.17 | 0.15 | 0.15 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investments |
3.44 | 6.79 | 3.10 | (12.21 | ) | 10.75 | |||||||||||||||||
Total from Investment Operations |
3.83 | 7.09 | 3.27 | (12.06 | ) | 10.90 | |||||||||||||||||
Less Distributions from: | |||||||||||||||||||||||
Net investment income | (0.41 | ) | (0.33 | ) | (0.18 | ) | (0.15 | ) | (0.14 | ) | |||||||||||||
Net Asset Value, end of year | $ | 52.47 | $ | 49.05 | $ | 42.29 | $ | 39.20 | $ | 51.41 | |||||||||||||
Total Investment Return(2) | 7.78 | % | 16.80 | % | 8.44 | % | (23.50 | )% | 26.87 | % | |||||||||||||
Ratios and Supplemental Data: | |||||||||||||||||||||||
Net assets, end of year (000's) |
$ | 21,466,322 | $ | 21,222,874 | $ | 17,093,892 | $ | 18,090,962 | $ | 20,557,957 | |||||||||||||
Ratios to average net assets: | |||||||||||||||||||||||
Expenses | 0.20 | % | 0.20 | % | 0.20 | % | 0.20 | % | 0.20 | % | |||||||||||||
Net investment income | 0.70 | % | 0.67 | % | 0.52 | % | 0.32 | % | 0.33 | % | |||||||||||||
Portfolio turnover rate(3) | 28.68 | % | 4.96 | % | 8.19 | % | 10.00 | % | 8.42 | % | |||||||||||||
The financial highlights summarize the impact of net investment income, net realized and unrealized gains and losses and distributions on a single share of the PowerShares QQQ Trust, Series 1 outstanding for each period presented. Additionally, important relationships between certain financial statement items are expressed in ratio form. |
(1) Calculated using average shares outstanding method.
(2) The total return calculation assumes the reinvestment of dividends and capital gain distributions, if any, at net asset value. Total return excludes the effect of transaction fees connected to the creation and redemption of Creation Units and brokerage commissions incurred by purchasing and/or selling shares of the Trust in the secondary market. Currently, the Trust does not have a dividend reinvestment program.
(3) Portfolio turnover excludes securities received or delivered from processing creations or redemptions of PowerShares QQQ Trust units.
See accompanying notes to financial statements.
9
PowerShares QQQ Trust, Series 1
Notes to Financial Statements
September 30, 2011
1. Organization
PowerShares QQQ Trust, Series 1 (the "Trust") is a unit investment trust created under the laws of the State of New York and registered under the Investment Company Act of 1940. The Trust was created to provide investors with the opportunity to purchase units of beneficial interest in the Trust representing proportionate undivided interests in the portfolio of securities held by the Trust, which consists of substantially all of the securities, in substantially the same weighting, as the component securities of the Nasdaq-100 Index.
Invesco PowerShares Capital Management, LLC is the Sponsor of the Trust and The Bank of New York Mellon is the Trustee. Effective March 21, 2007, sponsorship of the Nasdaq-100 Trust, Series 1 was transferred to Invesco PowerShares Capital Management, LLC pursuant to a transaction agreement between Invesco PowerShares Capital Management, LLC and The Nasdaq Stock Market, Inc., the parent of the former sponsor, Nasdaq Global Funds, Inc. Effective upon the transfer of sponsorship, the name of the Trust was changed from Nasdaq-100 Trust, Series 1 to PowerShares QQQ Trust, Series 1.
2. Significant Accounting Policies
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (hereafter referred to as "authoritative guidance") requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Trust.
Security Valuation
Portfolio securities are valued at the Nasdaq official closing price of The Nasdaq Stock Market, Inc. (the "Nasdaq Stock Market"), which is deemed to be the principal market on which the securities are traded. If there is no Nasdaq official closing price on the day of valuation, a security is valued at the closing bid price of the Nasdaq Stock Market. If a security is not quoted on the Nasdaq Stock Market, or the principal market of the security is other than the Nasdaq Stock Market, or the Trustee deems the official close price or closing bid price inappropriate for valuation purposes, then the security shall be fair valued by the Trustee in good faith based (a) on the closing price for the security on another market on which the security is traded or if there is no such appropriate closing price, at the closing bid price on such other market, (b) on current bid prices on the Nasdaq Stock Market or such other markets, (c) if bid prices are not available, on the basis of current bid prices for comparable securities, (d) by the Trustee appraising the value of the securities in good faith, or (e) any combination thereof.
10
The authoritative guidance for fair value measurements and disclosures defines fair value as the price the Trust would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a framework for measuring fair value and a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The guidance establishes three tiers of inputs ("Levels") that may be used to measure fair value. The three tiers of inputs are summarized at the end of the Schedule of Investments.
The Trusts' policy is to disclose significant transfers between Levels based on valuations at the beginning of the reporting period. Each portfolio may hold securities which are periodically fair valued in accordance with the Trusts' fair value procedures. This may result in movements between Levels 1, 2 and 3 throughout the reporting period. For the year ended September 30, 2011, there were no significant transfers between Levels 1, 2, and 3 assets and liabilites.
New Accounting Pronouncements Not Yet Effective
In May 2011, the International Accounting Standards Board and the Financial Accounting Standards Board issued new guidance to improve and align fair value measurement and disclosure requirements. The guidance was issued as International Financial Reporting Standard ("IFRS") 13, Fair Value Measurement, and Accounting Standards Updated ("ASU") No, 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. IFRS 13 and ASU 2011-04 include common requirements for measurement of, and disclosure about, fair value between U.S. GAAP and IFRS. ASU 2011-04 will require reporting entities to make disclosures about amounts and reasons for all transfers in and out of Level 1 and Level 2 fair value measurements. The new and revised disclosures are effective for interim and annual reporting periods beginning after December 15, 2011. Management has concluded that ASU 2011-04 will not impact the financial statements.
Investment Transactions
Investment transactions are recorded on trade date. Realized gains and losses from the sale or disposition of securities are recorded on a specific identification basis. Dividend income is recorded on the ex-dividend date. Dividends received by the Trust may be subject to withholding and other taxes imposed by foreign countries.
Distributions to Unitholders
The Trust declares and distributes dividends, if any, from net investment income quarterly. The Trust will declare and distribute net realized capital gains, if any, at least annually.
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Federal Taxes
The Trust has qualified and intends to continue to qualify for and elect treatment as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended. By so qualifying, the Trust will not be subject to federal income taxes to the extent it distributes all of its investment company taxable income and any net realized capital gains, each fiscal year. In addition, by distributing each calendar year substantially all of its net investment income and capital gains, if any, the Trust will not be subject to federal excise tax. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. To the extent these differences are permanent, such amounts are reclassified within the capital accounts based on their federal tax basis treatment; temporary differences do not require such reclassification.
The Trust is subject to authoritative guidance with respect to accounting for uncertainties in income taxes. Management has analyzed the Trust's tax positions taken or expected to be taken on its federal income tax return for all open tax years and has concluded that, as of September 30, 2011, no provision for income tax would be required in the Trust's financial statements. The Trust files tax returns in the U.S. Federal jurisdiction and certain other jurisdictions. Generally the Trust is subject to examinations by such taxing authorities for up to three years after the filing of the return for the tax period.
3. Federal Tax Information
At September 30, 2011, permanent differences primarily due to the tax treatment of in-kind transactions and capital loss carry forward expirations were reclassified within the components of net assets of the Trust. These differences resulted in a net decrease in accumulated net realized loss on investments and a corresponding decrease to paid in capital of $3,504,056,676. This reclassification had no effect on net assets of the Trust.
The tax character of distributions paid during the years ended September 30, 2011, 2010 and 2009 was $166,193,995, $123,414,558 and $71,964,054 of ordinary income, respectively.
Under the recently enacted Regulated Investment Company Modernization Act of 2010, the Trust will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years. As a result of this ordering rule, pre-enactment capital loss carryforwards may have an increased likelihood to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term losses rather than being considered all short-term as under previous law.
Capital losses incurred after October 31 ("post-October" losses) within the taxable year are deemed to arise on the first business day of the Trust's next taxable year.
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The Trust incurred and will elect to defer net capital losses of $227,426,982 for the year ended September 30, 2011. These carryover losses may be used to offset future gains. To the extent they are so used, future gains will not be distributed to unitholders until they exceed available loss carryovers.
As of September 30, 2011, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Accumulated capital and other losses | $ | (10,948,817,865 | ) | ||||
Undistributed ordinary income | 31,695,676 | ||||||
Net unrealized depreciation | (6,724,725,556 | ) | |||||
Total accumulated deficit | $ | (17,641,847,745 | ) |
During the fiscal year ended September 30, 2011, the Trust had a capital loss carryforward of $5,729,023,648 which expired. At September 30, 2011, the Trust has a capital loss carryforward of $10,721,390,883 of which $3,015,741,745 expires in 2012, $1,687,659,839 expires in 2013, $654,169,365 expires in 2014, $1,409,611,668 expires in 2015, $1,626,542,181 expires in 2016, $610,749,524 expires in 2017, $1,571,731,420 expires in 2018 and $145,185,141 expires in 2019.
4. Transactions with the Trustee, Licensor and Sponsor
The Trust pays the expenses of its operations, including Trustee fees, reimbursement to the Sponsor for expenses relating to the marketing of the Trust and fees to The Nasdaq Stock Market, Inc. (the "Licensor") for a license to use the Nasdaq-100 Index as a basis for determining the composition and weighting of securities held by the Trust.
Effective March 21, 2007, in connection with the transfer of sponsorship, Invesco PowerShares Capital Management, LLC entered into a license agreement with The Nasdaq Stock Market, Inc. (the "License Agreement"). Under the License Agreement, the license fee payable by the Trust is at an annual rate equal to the sum of (i) the product of (A) that portion of the average net assets of the Trust and the PowerShares EQQQ Fund, on an aggregate basis, up to and including $25,000,000,000 and (B) 0.09%, and (ii) the product of (A) an amount equal to that portion of the average net assets of the Trust and the PowerShares EQQQ Fund, on an aggregate basis, in excess of $25,000,000,000 and (B) 0.08%, with such sum multiplied by the percentage of the aggregate average net assets attributable to the Trust. License fees of $5,131,168 were payable to the Licensor at September 30, 2011. The license fee, under no circumstances, will exceed 0.09% of the aggregate average net assets, but may be lower in the future based on the aggregate average net assets. The license fee payable to the Licensor, prior to March 21, 2007, was 0.04% of the average net assets of the Trust. The License Agreement may be amended by the parties thereto without the consent of any of the beneficial owners of PowerShares QQQ shares and the License Agreement has no express termination date.
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Prior to the transfer of sponsorship, Nasdaq Global Funds, Inc., the former sponsor, voluntarily agreed to absorb or reimburse the Trust for ordinary operating expenses of the Trust to the extent that such expenses exceeded 0.20% per annum of the daily net asset value of the Trust. Effective March 21, 2007, in its capacity as the new sponsor, Invesco PowerShares Capital Management, LLC has continued to undertake, until otherwise determined, the reimbursement of ordinary operating expenses of the Trust, to the extent that such expenses exceed 0.20% per annum of the daily net asset value.
The Sponsor retains the ability to be repaid by the Trust for expenses so reimbursed or assumed to the extent that subsequently during the fiscal year expenses fall below the applicable per annum level on any given day. For the years ended September 30, 2011, 2010 and 2009, ordinary operating expenses incurred by the Trust did not exceed the 0.20% per annum level and, accordingly, no expenses of the Trust were assumed by the Sponsor.
In accordance with the Trust Agreement, the Trustee maintains the Trust's accounting records, acts as custodian and transfer agent to the Trust, and provides administrative services, including filing of all required regulatory reports. The Trustee is also responsible for determining the composition of the portfolio of securities, which must be delivered in exchange for the issuance of Creation Units of the Trust, and for adjusting the composition of the Trust's portfolio from time to time to conform to changes in the composition and/or weighting structure of the Nasdaq-100 Index. For these services, the Trustee receives a fee at the following annual rates:
Net Assets of the Trust |
Fee as a Percentage of Net Assets of the Trust |
||||||
$0-$499,999,999* | 10/100 of 1% per annum | ||||||
$500,000,000-$2,499,999,999* | 8/100 of 1% per annum | ||||||
$2,500,000,000-$24,999,999,999* | 6/100 of 1% per annum | ||||||
$25,000,000,000-$49,999,999,999* | 5/100 of 1% per annum | ||||||
$50,000,000,000 and over* | 4/100 of 1% per annum |
* The fee indicated applies to that portion of the net assets of the Trust which falls in the size category indicated and is computed each business day on the basis of the net assets of the Trust on such day.
The minimum annual fee, which shall be paid to the Trustee, is $180,000. To the extent that the amount of the Trustee's compensation is less than such minimum annual fee, the Sponsor has agreed to pay the amount of such shortfall. Trustee fees of $1,132,786 were payable to the Trustee at September 30, 2011.
Marketing expenses paid by the Sponsor on behalf of the Trust for invoices received directly by the Sponsor during the year remain payable in the amount of $8,183,413 to the Sponsor at September 30, 2011.
ALPS Distributors, Inc. (the "Distributor") is the distributor for the Trust. The Sponsor, not the Trust, pays the Distributor a flat annual fee of $35,000 for its distribution services.
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5. Related Party Transactions
During the fiscal years ended September 30, 2011, 2010 and 2009, the Trust paid $9,291,660, $1,675,802 and $3,500,188, respectively, in commissions on trades to a related party, BNY ConvergEx Group. BNY ConvergEx Group is an affiliate of the Trustee.
6. Transactions in Shares of the PowerShares QQQ Trust, Series 1
Transactions in shares were as follows:
For the Year Ended September 30, 2011 |
For the Year Ended September 30, 2010 |
For the Year Ended September 30, 2009 |
|||||||||||||
PowerShares QQQ Index Tracking Stock shares sold . |
1,369,200,000 | 1,486,600,000 | 1,451,050,000 | ||||||||||||
PowerShares QQQ Index Tracking Stock shares redeemed . |
(1,392,750,000 | ) | (1,458,150,000 | ) | (1,508,250,000 | ) | |||||||||
Net increase (decrease) | (23,550,000 | ) | 28,450,000 | (57,200,000 | ) |
PowerShares QQQ Index Tracking Stock shares are issued and redeemed by the Trust only in Creation Unit size aggregations of 50,000 PowerShares QQQ Index Tracking Stock shares. Such transactions are only permitted on an in-kind basis, with a separate cash payment that is equivalent to the undistributed net investment income per PowerShares QQQ Index Tracking Stock share and a balancing cash component to equate the transaction to the net asset value per share of the Trust on the transaction date. The transaction fee charged in connection with creation or redemption of Creation Units through the PowerShares QQQ Trust Clearing Process is either, $0, $500 or $1,000 per Participating Party per day, depending on specific circumstances. The total fee charged in connection with the creation or redemption of Creation Units outside the PowerShares QQQ Trust Clearing Process is $4,000 per Participating Party per day.
Transaction fees are received by the Trustee from the Participating Party and used to offset the expense of processing orders. For the years ended September 30, 2011, 2010 and 2009, the Trustee earned $1,192,050, $1,294,000 and $1,310,000, respectively, in transaction fees. The Trustee, in its sole discretion, may voluntarily reduce or waive the transaction fee, or modify the transaction fee schedule, subject to certain limitations. There were no such reductions or waivers for the years ended September 30, 2011, 2010 and 2009.
7. Investment Transactions
For the year ended September 30, 2011, the Trust had purchases and sales of investment securities of $6,770,774,305 and $6,770,153,900 respectively. This excludes securities received or delivered from processing creations or redemptions of the Trust. At September 30, 2011, the cost of investments for federal income tax purposes was $28,209,865,471. Accordingly, gross unrealized depreciation was $6,792,168,299 and gross unrealized appreciation was $67,442,743 resulting in net unrealized depreciation of $6,724,725,556.
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8. Representations and Indemnifications
In the normal course of business, the Trust enters into contracts that contain a variety of representations and warranties, which provide general indemnifications. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. However, based on experience, the Trust expects the risk of loss to be remote.
9. Subsequent Events
Management has evaluated events and transactions for potential recognition or disclosure in the financial statements through the date the financial statements were available to be issued. Management has determined that there are no material events that would require disclosure in the Trust's financial statements through this date.
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Supplemental Information (Unaudited)
Information Regarding Closing Prices vs. Net Asset Value
Frequency Distribution
The table that follows presents information about the differences between the daily market prices on secondary market for one share of the Trust and that Trust's net asset value. Net Asset Value, or "NAV", is the price at which a Trust issues and redeems shares. The "Closing Market Price" of a share in the Trust is determined and published by the Nasdaq Stock Market, as of the time that the Trust's NAV is calculated. The Trust's Closing Market Price may be below, at or above, its NAV. The NAV will fluctuate with the changes in the market value or its portfolio holdings.
Premiums or discounts are the differences (expressed as a percentage) between the NAV and Closing Market Price of a Trust on a given day, generally at the time the NAV is calculated. A premium is the amount that a Trust is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that a Trust is trading below the reported NAV, expressed as a percentage of the NAV.
The following information shows the frequency distributions of premiums and discounts for the Trust for the period October 1, 2010 through September 30, 2011.
Each line in the table shows the number of trading days that the Trust traded within the premium/discount range indicated. The number of trading days in each premium/discount range is also shown as a percentage of the total number of trading days in the period covered by the table. All data presented here represents past performance, which cannot be used to predict future performance.
PowerShares QQQ Trust
Frequency Distribution of Discounts and Premiums
Closing Price vs. Net Asset Value (NAV)*
Five year Period Ended 09/30/11 (unaudited)
Premium/Discount Range |
Number of Trading Days(1) |
Percentage of Total Trading Days |
|||||||||
Greater than 0.25% | 21 | 1.67 | % | ||||||||
Between zero and 0.25% | 546 | 43.37 | % | ||||||||
Closing Price Equal to NAV | 0 | 0.00 | % | ||||||||
Between zero and -0.25% | 677 | 53.77 | % | ||||||||
Less than 0.25% | 15 | 1.19 | % | ||||||||
Total | 1259 | 100.00 | % |
* Consolidated closing prices and non-truncated NAVs were used.
(1) Number of Trading Days refers to the number of days during which there is buy/sell activity for the Trust on the Exchange.
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Comparision of Total Returns Based on NAV and Close Price(1)
From Inception to 09/30/2011 (unaudited)
Cumulative Total Return
1 Year | 5 Year |
Since Inception |
|||||||||||||
PowerShares QQQ Trust | |||||||||||||||
Return Based on NAV | 7.78 | % | 32.48 | % | 7.30 | % | |||||||||
Return Based on Close Price | 7.77 | % | 32.55 | % | 7.14 | % | |||||||||
Index | 7.99 | % | 33.68 | % | 10.12 | % |
Annualized Total Return
1 Year | 5 Year |
Since Inception |
|||||||||||||
PowerShares QQQ Trust | |||||||||||||||
Return Based on NAV | 7.78 | % | 5.79 | % | 0.56 | % | |||||||||
Return Based on Close Price | 7.77 | % | 5.79 | % | 0.55 | % | |||||||||
Index | 7.99 | % | 5.97 | % | 0.77 | % |
(1) Cumulative Total Return and Average Total Return for the period since inception is calculated from the inception date March 10, 1999.
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PowerShares QQQ Trust, Series 1
Sponsor
Invesco PowerShares Capital Management LLC
301 West Roosevelt Road
Wheaton, IL 60187
Trustee
The Bank of New York Mellon
2 Hanson Place
Brooklyn, NY 11217
Distributor
ALPS Distributors, Inc.
1290 Broadway, Suite 1100
Denver, CO 80203
Independent Registered Public Accounting Firm
Ernst & Young LLP
5 Times Square
New York, NY 10036
Legal Counsel
Jones Day
222 East 41st Street
New York, NY 10017
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P-QQQ-AR-1