What is the Nasdaq?

So you’ve decided to buy shares in several different big US tech companies but you’re getting fed up having to track so many companies and pay spread fees each time. Wouldn’t it be good if there was one fund that contained all these companies to save you some time and effort? Enter the Nasdaq composite index. 

The Index contains all the big players; Apple, Google, Amazon, Microsoft, Facebook, Tesla, you name it. If you’ve been investing in recent years or just kept track of what’s happening on the news you have probably heard that US tech companies have been doing really well over the last 12 to 13 years since the 2008 market crash. 

The Nasdaq is a stock exchange with over 3000 companies listed and it has a higher trading volume than any other exchange in the US although the most common way to invest in the Nasdaq is through the Nasdaq-100. The Nasdaq-100 is the biggest 100 non financial companies on the exchange and you can invest in this through funds like the Invesco Nasdaq-100 (ticker symbol QQQ). 

The fund is made up of close to 50% tech with communication services coming in at around 20% although these companies are generally still considered tech (Facebook and Google). The top 10 holdings make up close to 50% of the funds value and is market weighted so Apple makes up over 10% alone. Most people don’t realise that there are non tech companies in the Nasdaq-100 index as well, some note worthy mentions are monster beverage corp and PepsiCo Inc. 

A market weighted or capitalisation weighted index refers to a market index that has individual components make up the index based on their own market capitalisation. In other words, the bigger the company the greater the position it has in the portfolio.

Nasdaq vs the S&P 500

The S&P 500 is probably the best market index to compare to the Nasdaq-100 as it’s a popular index containing the biggest companies in the US which has seen very good returns over the last decade or so. The S&P has returned close to 13.5% annually over the last decade, the Nasdaq-100 on the other hand has seen close to a 22% annual return. Whilst the Nasdaq is a clear winner here it’s not all so cut and dry, after the dot com bubble in 2000 the S&P 500 dropped close to 50% in the following 2 years whilst the Nasdaq dropped 78%. It took the S&P 500 8 years to recover from the dot com bubble whilst it took the Nasdaq 13. You can see why the S&P 500 is a popular choice for many, it doesn’t have the upside of the Nasdaq but it also doesn’t have the downside either. 

Is it a Good Investment?

The one big issue many investors have with investing in the Nasdaq is the current valuation. As previously mentioned, big tech has been doing really well and it makes up the bulk of the portfolio, although what goes up must come down, right? We’re big fans of Jack Bogle and one of his famous rules for investing is reversion to the mean, this is the idea that over the long term all things will trend back to its historical averages. In other words, if the Nasdaq is overvalued now it will likely go through a period of capital depreciation. The problem with investing in an index that contains many overvalued companies is that it’s similar to going to the supermarket and paying more for your groceries than they’re worth. 

The best investment in the stock market is the one that’s the best value and provides the best return over time, Apple, Amazon, Tesla etc are all great companies that will probably continue to grow into the future but if the stock price is already high it’s probably not the best investment. If there was a repeat of the dot com bubble and the market crashes then it would be hard to stomach having to wait 13 years for your portfolio to recover, unless of course you’re investing for a 20-30 year time horizon in which case the fund would probably have time to recover and still gain a significant return, especially if you continue to dollar cost average into the fund when it drops in value and some of your money is invested near the bottom.

Another issue many investors have with the Nasdaq is the lack of diversification. The S&P 500 or the total US market index might do better in certain market conditions such as a recession as they have a more diversified selection of companies. It also might not be considered a good one fund investment compared to something like the FTSE All World (ticker VWRL) as it’s entirely based on US companies. To be fair though, if you’ve invested in only US companies over the last decade you’ve probably done really well and even Jack Bogle recommends investing in US market index’s as many of the big players derive 50% of their revenues from overseas anyway so you’re investing in the world indirectly. 

Bottom Line 

Investing in the Nasdaq-100 is a great way to get exposure to big successful tech companies in the US and those who’ve invested in the fund probably seen a very good return over the last 12 to 13 years. Many would consider the fund to be currently overvalued right now but if you’re investing for a long time horizon then it probably doesn’t matter all that much. The Nasdaq is a good alternative to something like the S&P 500 if you’re willing to take on a bit more risk as there’s a higher chance for growth over the long term. 

The views expressed in this post are the authors and should not be construed as financial advice

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Author

David is an Engineer and Finance Writer educated to masters degree level with sound knowledge in investing, the stock market and personal finance. We hope the information provided on this site can help you achieve your financial goals.

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