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The second largest stock exchange in the world, the Nasdaq also manages two major stock indices based on the companies that trade on its exchange: the Nasdaq Composite and the Nasdaq 100. The Nasdaq Composite tracks the performance of more than 3,000 stocks listed on the Nasdaq while that the The Nasdaq 100 captures the performance of the largest non-financial stock exchanges.
The Nasdaq Composite Index
The Nasdaq Composite Index is one of the most closely followed stock market indices in the United States. Along with the Dow Jones Industrial Average (DJIA) and the S&P 500, it is one of the three most popular stock indexes cited by market commentators to represent how the stock market as a whole is performing on any given day. The stock symbol for Nasdaq Composites is IXIC. (This is the short code that you can use to quickly check its performance.)
The Nasdaq Composite tracks virtually all companies listed on the Nasdaq Stock Exchange. To be listed on the stock exchange (and therefore to be included in the composite), a share must be listed exclusively on the Nasdaq stock exchange (or have benefited from a double listing) as well as be an ordinary share of a national company or be an ADR from a foreign company. No preferred shares or exchange traded funds (ETFs) are included in the index.
Since there is a high concentration of tech companies listed on the Nasdaq Stock Exchange, the Nasdaq Composite is generally viewed as a surrogate for the performance of the entire tech industry. Technology companies make up around 50% of the index, consumer services companies around 20%, and healthcare companies around 10%. The rest are in stock sectors like utilities, petroleum, and telecommunications.
As a market capitalization weighted index, each company included in the Nasdaq Composite is weighted by its total market capitalization or the market value of its outstanding shares. Large companies with larger capitalizations therefore have a greater impact on index performance than small companies.
For example, while the Nasdaq Composite Index contains thousands of stocks, only 10 companies represent 43% of its total portfolio by market capitalization. The top 10 companies in the Nasdaq Composite Index are:
Performance of Nasdaq composites
Over the past 10 years, the Nasdaq Composite has outperformed other stock indexes. In fact, it has beaten the S&P 500 in 11 of the past 13 years. Its cumulative return for the period from December 31, 2007 to December 31, 2020 was 608%. For the same period, the cumulative return of the S&P 500 was only 236%.
While its heavy technology weighting is responsible for much of its current outsized returns, it has also resulted in equally disproportionate declines. The 2008 recession and the dot-com bubble, for example, brought down the Nasdaq Composite as tech companies shut down. But over time, it recovered and outpaced other indexes as growth-oriented tech companies flourished.
The Nasdaq 100 index
The Nasdaq 100 has a much narrower scope than the Nasdaq Composite: it tracks the 100 largest companies by market capitalization that are listed on the Nasdaq stock exchange, excluding companies in the financial sector. The companies tracked by the Nasdaq 100 index represent more than 90% of the market capitalization of the Nasdaq Composite index. The Nasdaq 100 ticker symbol is NDX.
The Nasdaq 100 Index uses what it calls a modified market cap weighting, although typically the larger stocks have the greatest impact on the value of the Nasdaq 100. The Nasdaq uses a somewhat complicated methodology to determine the weighting of the index, which is based mainly on market capitalization, plus certain other thresholds to prevent larger stocks from having too large an impact on performance.
Like its sibling index, the Nasdaq 100 is heavily weighted in favor of tech companies, which account for over 50% of the index weight. That said, the Nasdaq Composite gives a more representative sample of all stocks listed on the Nasdaq Exchange, with a broader view of the stock market as a whole.
The weighting of companies included in the Nasdaq 100 is rebalanced once per quarter, in March, June, September and December. Companies that no longer meet the Nasdaq 100 inclusion rules are replaced with new companies once a year during the third week of December.
Nasdaq 100’s Performances
Like the Nasdaq Composite, the Nasdaq 100 has outperformed many other major indices in recent years. Over the past 10 years, for example, it has recorded total returns of over 550%, almost double that of the S&P 500 over the same period.
However, due to its strong representation of tech stocks, the Nasdaq 100 suffers from many of the same industry weaknesses as the Nasdaq Composite. This means that its overall performance may be more affected by certain sectors, like technology, which are performing poorly.
How to invest in a Nasdaq index
The easiest way to invest in Nasdaq Composite and Nasdaq 100 companies is through index funds and ETFs, both of which seek to mimic the performance of particular indices. When you buy stocks in index funds and ETFs, you are buying a portfolio of securities. These can contain hundreds or thousands of company stocks, depending on the index you select, which instantly diversifies your portfolio.
How to invest in the Nasdaq Composite
There are several funds that mimic the performance of the Nasdaq Composite, including these two popular options:
- Fidelity Nasdaq Composite Index Fund (FNCMX). The objective of this index fund is to provide results that closely mirror the price and returns of the Nasdaq Composite.
- Fidelity Nasdaq Composite Index ETF (ONEQ). This ETF invests 80% of its assets in the companies making up the Nasdaq Composite.
How to invest in the Nasdaq 100
QQQ and TQQQ are two of the most well-known ETFs that track the performance of the Nasdaq 100 Index. Both are among the most traded and widely held ETFs in the US stock market.
The Invesco QQQ (QQQ) fund is a straightforward passive tracking ETF that attempts to replicate the performance of the Nasdaq 100 as closely as possible. As of July 2021, it had over $ 180 billion in assets under management.
The ProShares UltraPro QQQ (TQQQ) is a very different animal from QQQ. It is a leveraged ETF, which means it goes into debt and uses advanced trading techniques to triple the daily returns of the Nasdaq 100. A gain of 1% of the Nasdaq 100 would translate to a gain of 3 % of TQQQ while a drop of 1% would mean a 3% loss for TQQQ. This type of ETF is a very risky and highly speculative instrument. TQQQ had approximately $ 12.5 billion in assets under management as of July 2021.
While investing in a fund that tracks a Nasdaq index has historically paid off, past performance does not mean that the index will continue to perform the same in the future. It’s a good idea to consult a financial advisor to discuss your finances and goals, and to design an investment strategy that’s right for you.
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