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Many investors consider the Nasdaq 100 a major US stock market index comprising companies from sectors like technology, healthcare, and consumer services. This blog aims to unpack the Nasdaq 100’s workings, its composition and performance and highlight its role in the investment landscape.
What is the Nasdaq 100?
The Nasdaq 100 Index, known as NDX, is a stock market index comprising 102 stocks from 101 leading non-financial companies listed on the Nasdaq exchange. Launched on January 31, 1985, the Nasdaq 100 serves as a benchmark for US technology and large-cap stock performance, mirroring the economic health of the technology sector and broader market trends. Its significance in the US stock market is on par with other major indices like the S&P 500, reflecting pivotal market movements and investor sentiment.
How does the Nasdaq 100 Index work?
The Nasdaq 100 Index employs a methodology to reflect market dynamics without its largest constituents influencing it. Here’s a breakdown of how the Nasdaq 100 index works:
Weighting method: The index weights its constituents based on market capitalization, but with a ‘modified’ approach that caps the weight of the largest companies. This prevents any single entity, such as a market giant like Apple Inc., from exerting too much influence on the index’s performance. This approach aims to maintain diversification and fair representation of all member companies.
Quarterly rebalancing: The Nasdaq 100 is reviewed and adjusted quarterly to ensure that the index continues to represent the market segment it’s intended to track. This rebalancing accounts for changes in the market caps of existing index members due to factors like stock price movements, share issuances, or corporate actions. Regular rebalancing helps maintain the integrity of the index as a reliable benchmark.
Sector composition: Financial companies are excluded from the Nasdaq-100 to avoid sector concentration, particularly given the existence of another index, the Nasdaq Financial-100, which tracks financial sector stocks. This ensures that the Nasdaq-100 remains a key barometer for the tech and consumer sectors, among others.
Listing criteria: Companies must be listed exclusively on the Nasdaq and comply with specific requirements, including trading volume [minimum of 200,000 daily shares traded] and financial reporting. This exclusivity ensures that the index captures the essence of Nasdaq’s market, where many innovative and high-growth companies are listed. The trading volume criterion ensures liquidity, which is crucial for the index to be a viable and actionable benchmark for investors.
Sector weighting: The index is weighted toward technology stocks, reflecting the predominance and growth of the tech sector in the modern economy. The significant presence of tech companies in the index provides insight into the performance and trends of an industry that’s central to global innovation and economic progress.
Company selection: It includes the largest 101 non-financial companies from over 3,000 on the Nasdaq, contributing to the Nasdaq Composite Index. By focusing on the largest companies by market cap, the index aims to represent the most significant and impactful players within the non-financial sectors.
Difference between Nasdaq Composite and Nasdaq 100
The Nasdaq 100 is often mistaken for the Nasdaq Composite Index, yet they are distinct.
The Composite includes all Nasdaq-listed stocks, totalling more than 3,000, while the Nasdaq 100 focuses on the largest 100 non-financial companies. Established as a modified capitalization-weighted index in 1998, the Nasdaq-100 uses a methodology that reduces the dominance of its biggest firms for enhanced diversification. A major rebalance occurred in May 2011 to align it closer to pure market-cap weighting.
The Nasdaq 100 rebalances quarterly if a single company exceeds 24% of the index or if the cumulative weighting of companies with at least 4.5% reaches 48% or more. Annual rebalancing is done after quarterly adjustments if one company comprises more than 15% of the index or if the top five companies make up 40% or more of the index’s total market capitalization.
Composition of the Nasdaq 100 Index
The composition of the Nasdaq 100 Index provides a snapshot of the most important non-financial companies on the Nasdaq stock exchange. Here is the sectoral composition:
(As of October 2024. Sector allocations are subject to change)
- Technology (59.91%)
- Consumer Discretionary (17.74%)
- Healthcare (5.96%)
- Telecommunications (4.55%)
- Industrials (4.46%)
- Consumer Staples (3.37%)
- Utilities (1.40%)
- Basic Materials & Energy (1.81%)
The top 10 constituents by weight in the Nasdaq 100 are:
- Apple Inc. (9.01%)
- NVIDIA Corporation (8.18%)
- Microsoft Corporation (7.89%)
- Broadcom Inc. (5.34%)
- Meta Platforms, Inc. (5.17%)
- Amazon.com, Inc. (4.99%)
- Tesla, Inc. (2.69%)
- Costco Wholesale Corporation (2.60%)
- Alphabet Inc. – Class A shares (2.46%)
- Alphabet Inc. – Class B shares (2.36%)
What is the average return on the Nasdaq 100 Index?
Between 2000 and 2023, the Nasdaq 100 Index had an annualized return of 22.26%.
This index was affected by the 2000 dot-com crash and has seen varied performance over different periods. While generally underperforming compared to the S&P 500, periods of outperformance have been seen in the long term. When considering returns from an Indian Rupee (INR) perspective, it’s important to account for currency exchange fluctuations, which impact Indian investors’ actual returns.
Over the past decade, the Nasdaq 100 has yielded a return of over 24% per year. This adjusts for the Indian Rupee’s fall against the US Dollar. An investment of INR 100,000 in 2014 would grow to about INR 860,000 today. This shows the index’s strong performance for Indian investors.
Through platforms like Vested, investors can access ETFs that track the Nasdaq 100, offering a way to invest in US stocks.
How is the Nasdaq 100 Index different from the S&P 500 Index & Dow Jones?
The Nasdaq 100 and the S&P 500 are both stock indices, and the main difference between the Nasdaq 100 vs the S&P 500 is in their composition; the Nasdaq 100 includes 100 of the largest non-financial companies listed on the Nasdaq stock exchange and is weighted towards technology and biotech sectors. Meanwhile, the S&P 500 provides a broader representation of the US economy, including 500 companies from various sectors, including financial services.
When comparing the difference between the Nasdaq 100 vs Dow Jones, the Dow Jones Industrial Average (DJIA) consists of 30 large publicly-owned companies listed on the NYSE and Nasdaq. The DJIA is a price-weighted index, contrasting with the Nasdaq 100’s market-cap weighting. This means the DJIA’s performance is influenced more by high-priced stocks rather than large companies by market cap. The Nasdaq 100’s tech-heavy composition also contrasts with the more diversified industrial and financial sector exposure of the Dow Jones.
List of top 20 companies in Nasdaq 100
Here is the list of index constituents of the Nasdaq 100, representing some of the leading companies across various industries:
1. Apple Inc (AAPL)
2. NVIDIA Corp (NVDA)
3. Microsoft Corp (MSFT)
4. Broadcom Inc (AVGO)
5. Meta Platforms Inc (META)
6. Amazon.com Inc (AMZN)
7. Tesla Inc (TSLA)
8. Costco Wholesale Corp (COST)
9. Alphabet Inc (GOOGL)
10. Alphabet Inc (GOOG)
11. Netflix Inc (NFLX)
12. Advanced Micro Devices Inc (AMD)
13. T-Mobile US Inc (TMUS)
14. PepsiCo Inc (PEP)
15. Linde PLC (LIN)
16. Adobe Inc (ADBE)
17. Cisco Systems Inc (CSCO)
18. QUALCOMM Inc (QCOM)
19. Texas Instruments Inc (TXN)
20. Amgen Inc (AMGN)
