Summary

• Google's Willow chip marks a breakthrough in quantum computing, reducing errors and performing computations exponentially faster than classical computers.

• Quantum computing stocks like Rigetti, IonQ, D-Wave, and Quantum Computing Inc. have surged, highlighting the sector's growth potential.

• The Defiance Quantum ETF offers diversified exposure to leading quantum computing and AI companies, making it a strong buy for growth investors.

• The convergence of quantum computing and AI is poised to revolutionize technology, presenting significant investment opportunities in 2025 and beyond.

As we approach the end of 2024 and the stock market has rewarded the technology sector with big gains as the NASDAQ index breaks above the 20,000 mark, largely due to advancements in Artificial Intelligence, investors may be wondering what’s next. That question just might have been answered this week when Google (GOOG) announced its latest “mind-boggling” quantum computing chip, Willow. And as we approach 2025, the United Nations International Year of Quantum Science and Technology, quantum technologies will definitely be in the spotlight as public awareness will be raised by highlighting global initiatives in quantum science and technology.

This blog regarding the new Google Willow chip explains why it is considered such an amazing achievement.

• The first is that Willow can reduce errors exponentially as we scale up using more qubits. This cracks a key challenge in quantum error correction that the field has pursued for almost 30 years.

• Second, Willow performed a standard benchmark computation in under five minutes that would take one of today’s fastest supercomputers 10 septillion (that is, 1025) years — a number that vastly exceeds the age of the Universe.

And to further illustrate my point that QC (quantum computing) might just be the next big thing in technology after AI, the author of the Google blog, Hartmut Neven, Founder and Lead for Google Quantum AI, explains why he made the transition:

My colleagues sometimes ask me why I left the burgeoning field of AI to focus on quantum computing. My answer is that both will prove to be the most transformational technologies of our time, but advanced AI will significantly benefit from access to quantum computing. This is why I named our lab Quantum AI. … So, quantum computation will be indispensable for collecting training data that’s inaccessible to classical machines, training and optimizing certain learning architectures, and modeling systems where quantum effects are important. This includes helping us discover new medicines, designing more efficient batteries for electric cars, and accelerating progress in fusion and new energy alternatives. Many of these future game-changing applications won’t be feasible on classical computers; they’re waiting to be unlocked with quantum computing.

While Google and their Quantum AI lab are making progress in developing scalable QC solutions to further enable AI, there are other players in the QC universe who have also been in the news recently. One of those is Rigetti Computing (RGTI), a stock that has risen dramatically just in the past month by over 330% as of today, 12/13/24.

I wrote about RGTI just after they announced Q3 2024 earnings results and rated the stock a Hold at the time. In related news this week, Rigetti announced a successful effort along with Quantum Machines to use AI-powered calibration of a quantum computer.

There are some other up-and-coming competitors and developers of QC technology as well that have seen dramatic rises in their stock price in the past month. Some of those other companies include top Quant rated stocks IonQ, Inc. (IONQ), D-Wave Quantum (QBTS), and Quantum Computing, Inc. (QUBT). Looking at a 6-month chart of those four peer companies, it is apparent that all of them have seen dramatic price increases in the past month.

comparison chart

Seeking Alpha

As a growth investor looking for the next big thing in technology, how would one choose the best stock to take advantage of this growing trend? One way to achieve a potential strong return from the rise in quantum supremacy is to buy an ETF that holds the top performers in quantum computing and related technologies, and I believe that the Defiance Quantum ETF (NASDAQ:QTUM) is one to consider for that reason.

Overview of QTUM

From the Defiance QTUM website, this ETF is designed to provide exposure to companies that are at the forefront of those developing technologies:

QTUM provides exposure to companies on the forefront of machine learning, quantum computing, cloud computing, and other transformative computing technologies.

The underlying index of this quantum computing and machine learning ETF is called the BlueStar Quantum Computing and Machine Learning Index (BQTUM). It tracks approximately 71 globally-listed stocks across all market capitalizations.

The BlueStar Quantum Computing and Machine Learning Index is a rules-based index comprised of equity securities of leading global companies engaged in the research & development or commercialization of systems and materials used in quantum computing: advanced traditional computing hardware, high powered computing data connectivity solutions and cooling systems, and companies that specialize in the perception, collection and management of heterogeneous big data used in machine learning.

QUTM overview

Defiance website

Although QTUM has been in existence since 2018, it just this week surpassed $400M in assets. The ETF is up more than 40% on a YTD basis and has strong momentum heading into 2025.

QTUM chart

Seeking Alpha

The fund is actively managed, and the current top holdings include 3 of the 4 QC stocks that I mentioned in the introduction: RGTI, QBTS, and IONQ.

top holdings

Defiance QUTM website

Clearly the fund is being actively managed and based on the changes in top holdings just in the past three months, it is clear that the fund managers for QTUM are recognizing that the future is evolving rapidly. From the fund’s fact sheet, the top holdings as of 9/30/24 did not include any of the current top 5 holdings and instead held several Japanese stocks and other than NTT Data Group, none of the others are top holdings as of 12/13/24.

top holdings 9/30/24

QUTM fact sheet

To be honest, I am not convinced that the fund managers are applying the indexing strategy as stated above to the portfolio management strategy. Of course, the weightings of the current top holdings have gotten oversized from the rapid price acceleration. However, I am not sure, for example, how MicroStrategy (MSTR) fits as a top holding within the QC theme as it primarily holds a large reserve of bitcoin. It is a software company and the company mission suggests that it may be one that is at the forefront of cloud computing, AI, and intelligent enterprise software. However, it is really the bitcoin holdings that is powering the price of the stock higher.

Also unclear to me is how the defense stocks, LMT and NOC, fit into the quantum computing theme. Although they are no longer top holdings, they are still held by the fund, just in smaller percentages now.

fund holdings

QUTM website

After doing a quick Google search, I learned that Lockheed Martin has a Quantum Computing Center at the USC campus in LA. This Wikipedia entry explains the collaboration.

The USC-Lockheed Martin Quantum Computing Center is a joint scientific research effort between Lockheed Martin Corporation and the University of Southern California. The QCC is housed at the Information Sciences Institute, a computer science and engineering research unit of the USC Viterbi School of Engineering, and is jointly operated by ISI and Lockheed Martin.

USC faculty, ISI researchers and students are performing basic and applied research into quantum computing, and are collaborating with researchers around the world. The QCC uses a D-Wave Two quantum annealing system, manufactured by D-Wave Systems, Inc. The QCC is the first organization outside of D-Wave to operate the system. The second system is installed at NASA Ames Research Center, and is operated jointly by NASA and Google.

Alibaba Group (BABA) is another one that I found puzzling to be included as a top holding. Another Google search revealed that BABA and Baidu were the top two Chinese companies involved in Quantum research until they pulled out last year.

Chinese tech giants Alibaba and Baidu have pulled out of the quantum-computing race after shutting down their research units just over a month apart from each other. But experts say it would be premature to read this as any marked cooling of China’s overall interest in quantum computing.

Undoubtedly, the Chinese government is still very much involved in QC research and BABA is still likely to benefit economically, even if that mechanism is not apparent to investors.

Accenture (ACN) is another interesting choice that I would not have guessed was a big player in quantum technologies. As it turns out, their area of interest is in Quantum Security, which makes total sense now that I researched it.

The accelerated growth of quantum computing threatens to break current encryption, putting 75% of it at risk. But by advancing post-quantum security technologies, companies can protect sensitive information and maintain digital trust. A proactive approach is critical to staying both secure and competitive in a rapidly evolving tech landscape.

From their website, Accenture predicts a 31% annual growth rate in QC related data between 2022 and 2030. The technology landscape is indeed rapidly evolving. From an April 2024 insight by ETF sponsor Defiance regarding the Future of Fintech, the evidence points to a revolution in Quantum and AI applications.

The financial industry is on the cusp of a technological revolution. Quantum computing and artificial intelligence are not just buzzwords; they are shaping the future of finance, offering unprecedented opportunities and challenges.

Clearly, the technology revolution in quantum computing is rapidly evolving. The recent announcement from Google regarding the Willow chip has brought new attention to this trend, which has been spreading across market sectors and industries like wildfire in 2024.

As Defiance states in another insight promoting the QTUM ETF that they offer, investors may want to embrace the “quantum leap” in technology that is occurring today with the convergence of quantum computing and AI.

As we stand at the crossroads of technological innovation, the fusion of quantum computing and AI offers a glimpse into the future. For investors, this is an opportune moment to align their strategies with the technological advancements shaping our world. By staying informed and making informed decisions, investors can harness the power of quantum and AI to propel their portfolios into the future.

I like what I see in QTUM and rate the ETF a Buy for growth investors interested in seizing the opportunity to invest in this quantum leap in technology.