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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.
To be listed in the index of the 100, companies must meet specific requirements. It includes an average daily trading volume of 200,000 shares, being listed on the NASDAQ for at least three months, and adhering to market capitalisation and liquidity standards.
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.
Importance of the NASDAQ-100 Index
The Nasdaq 100 reflects the performance of major non-financial companies. It is particularly so for tech giants, driving innovation and employment globally. The Nasdaq 100 weightage is heavily skewed towards technology firms, making it a key indicator of trends in the tech sector. For companies listed on this exchange, inclusion in the Nasdaq 100 companies can enhance their visibility, and bolster their financial success.
Investing in the NASDAQ 100 Index
If you’re exploring how to invest in Nasdaq from India, you can gain exposure to the Nasdaq100 index through various options:
- Exchange-Traded Funds (ETFs): These funds track the performance of these companies and are a straightforward way to invest in the index.
- Mutual Funds: These funds invest in a diversified basket of the Nasdaq100 stocks, making them ideal for risk-averse investors.
For simplicity and reduced risk, ETFs are often the best choice for beginners seeking to explore the Nasdaq 100 companies by market cap.
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%)
Factors Affecting the Nasdaq 100 Index
The performance of the Nasdaq 100 stocks is influenced by:
- Technology Sector Trends: Innovation and shifts in consumer preferences impact the Nasdaq weightage, given its reliance on tech firms.
- Economic Indicators: GDP growth and unemployment rates shape investor confidence.
- Interest Rates: Lower rates drive investments in growth stocks, affecting the Nasdaq-100 compare metric with other indices.
- Corporate Earnings: Quarterly results from companies listed on this index directly influence the index’s movement.
- Global Events: Trade tensions, geopolitical risks, and supply chain disruptions can weigh on these companies.
- Market Sentiment: Bullish or bearish outlooks, fueled by news or analyst reports, impact the index’s performance.
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 Nasdaq composite 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)
How to Invest in the US Stock Market from India?
Here’s how to invest in Nasdaq from India or other similar markets:
- Direct Investment
- Domestic Broker with International Access: Open an overseas trading account with an Indian broker offering US market access.
- Foreign Broker Account: Directly register with brokers like interactive brokers for access to the Nasdaq index.
- Indirect Investment
- Mutual Funds: Choose funds focusing on these stocks for diversified exposure.
- ETFs: Invest in ETFs for cost-effective access to such stocks.
- Online Apps: Use platforms like Vested to purchase shares of these stocks effortlessly.
The diversified approach ensures investors can participate in the growth of these index stocks while considering risk preferences.
Conclusion
The Nasdaq 100 index represents the top 100 non-financial companies listed on the Nasdaq stock exchange, showcasing innovation across industries like technology, healthcare, and consumer services. Known for its dynamic growth and global influence, it offers investors exposure to market leaders. Its performance is driven by factors like market sentiment, corporate earnings, and technological advancements. To simplify your journey into global investing, platforms like Vested provide seamless access to these funds.
