What is the NASDAQ Index?
The NASDAQ index in the broadest sense appeared back in 1971. But over time, as the U.S. market developed and became more complex, many offshoots emerged from it. In fact, this reflects the state of the American technology market.
Let’s start with the NASDAQ Composite index. This is usually mentioned most often in the news. At the moment it’s more than 3,000 shares.
The key difference from the S&P 500 is that it includes not only American companies, but companies from all over the world. These are companies that are supposed to be fast-growing and high-tech. Started at 100 points in 1971. It has now surpassed 10,500 points.
You won’t find mature companies like Coca-Cola. You have to understand that despite the tremendous investor interest in recent years and the growth we have seen, things have not always been rosy. If we look at the chart, we see that for the first 30 years of its life, the index was rising nicely. Then it took a sharp leap upward in the late 1990s. That was what we call the dot-com bubble that burst in 2001. There were a huge number of bankruptcies of companies that were unprofitable, that weren’t really working, but were growing because IT was being bought all over the world.
Interestingly, after the dot-com crisis, the same Dow Jones and S&P 500 indices recovered faster. In 2016, there was already a new wave of growth. And was carried to levels never seen before. Of course, today many are saying that the NASDAQ index price is overvalued. And this is a problem that can lead to unfortunate consequences.
Only common NASDAQ stocks (IXIC) are included in the Composite. Companies get weighted based on their capitalization. The more expensive a company is valued, the more weight it has compared to smaller companies. The top 10 largest companies account for more than 40% of the weight of the entire industry.
The proportions by sector
- technology — it is almost 50%, maybe even more now;
- consumer services — about 20%;
- healthcare — a little over 10%.
- finance — 7%;
- industry — 7%;
- consumer goods — 6%;
- Utilities, telecom, oil & gas — less than 1%.
That is why NASDAQ is called a technology index. Although companies from other sectors are also traded there.
The Composite is quite difficult to break down what is happening objectively. Therefore industry varieties have emerged:
- Industrial — is the industrial sector.
- Bank — is the banking sector.
- Computer — software development.
- Biotechnology — is the pharmaceutical and biotechnology sector.
- 100 — stands for the largest 100 companies in the non-financial sector whose securities are traded on NASDAQ.
It came much later than the Composite and includes the 100 largest companies on the NASDAQ stock exchange, excluding the IXIC stock of the financial sector. In fact, it didn’t grow much over the years. But in the 1990s, of course, there was a boom here as well.
You have to understand that even though there are only 100 companies here, they cover more than 90% of the weight of the entire road. The top 10 companies there may be a little different. Here, already the 10 most expensive companies take more than half of the weight of the entire. It is clear that right now the index by capitalization is driven by IT giants. So we’re really buying this kind of compressed U.S. IT sector.
The emphasis is on the technology sector, but there are companies from other industries as well. It’s just that their influence is even less than their influence on the Composite.
Is different in that it is influenced not so much by intellectual property, patents, or any hopes for developing the IT industry, as by actual results in the field of biotechnology and pharmaceutical research. That’s where it’s cleared of any dot-com bubble.
It’s probably a different bubble. But one way or another, it is believed that when there is some positive research, biotech companies are happy with positive news. We should also not forget that the biotechnology field is FED by government subsidies. The U.S. government is quite generous in this sense.
Risks when investing
When you look at the technology sector and the growth of the Composite and NASDAQ-100, on the one hand, it is certainly impressive, but on the other it is frightening. Only lazybones aren’t talking about a bubble right now. So you have to take those risks into account, at least the risks of a fairly deep correction.
If you still think you want to see such assets in your portfolio, how can you invest? In the U.S. it’s a lot easier to do — through Interactive Brokers, on a sub-broker scheme. They have a huge selection of ETFs.
If you want to invest in Composite, the most common option is an ETF with the ticker symbol ONEQ. The annual fee is 0.21%. It’s a classic instrument.
If you want to aim squarely at intellectual property, choose the NASDAQ-100. The most popular ETF here is the ETF with the ticker symbol QQQ. The funds under management are over $120 billion. The commission is 0.2% per year. Of course, compared to our commissions, all this looks very, very attractive. By the way, there is also an alternative to QQQE, an ETF with the ticker symbol QQQE. This is an instrument with a commission of 0.35%. But its advantage is that here all companies have equal weight. There is no bias towards the tech giants.
If we compare the charts of the S&P 500 with the NASDAQ over the last 10 years, you can invest in the NASDAQ. But always look at the longer story. Just by the example of these two indices, we can see that what gives us a higher return is also a riskier instrument. Please don’t forget that!