Nasdaq-100 Index

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21 Aug, 2024

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The Nasdaq-100 Index (NDX) is a prominent large-cap growth index comprising 100 of the largest non-financial companies listed on the NASDAQ stock exchange. Notable corporations in the index span various sectors, including technology, healthcare, basic materials, telecommunications, industrials, utilities, consumer staples, and consumer discretionary.

The Nasdaq-100 Index is primarily important to U.S. investors because it offers exposure to the technology sector, a significant driver of the U.S. economy. It provides diversification by including large-cap stocks from various sectors, spreading risk. As a benchmark for technology and growth-oriented stocks, it serves as a valuable reference point for assessing the overall performance of the U.S. stock market and global economic conditions, making it essential for investment decision-making.

What Is the Nasdaq 100 Index?

Nasdaq-100 Index is a stock market index representing the performance of the 100 non-financial U.S. companies (domestic and international) with the highest market capitalization and those listed on the Nasdaq stock exchange.
The index holds stocks from eight different sectors, while the prominent one is technology; the others include healthcare, basic materials, telecommunications, industrials, utilities, consumer staples, and consumer discretionary.
Although investors and traders cannot directly invest in an index like Nasdaq-100, they can buy and sell index-linked products such as ETFs, futures, options, annuities, and CFDs that track the performance of such indices.

Nasdaq-100 Index Explained

The Nasdaq-100 index employs a market capitalization-weighted methodology, giving companies with higher market capitalization greater influence on their performance. The index's composition changes periodically as companies are added or removed based on market capitalization rankings, with quarterly revisions to maintain balance. It excludes financial sector companies and imposes restrictions to prevent dominance by any single company.

To be included in the Nasdaq-100 Index, a stock must meet specific criteria, including public trading availability for at least three months, exclusive listing on the Nasdaq exchange, and a substantial daily trading volume. The index covers eight sectors: technology, healthcare, basic materials, telecommunications, industrials, utilities, consumer staples, and consumer discretionary.

Top Ten Assets in the Index:

Apple Inc. (AAPL)
Microsoft Corporation (MSFT)
Alphabet Inc. Class C and Class A (GOOG, GOOGL)
Amazon.com Inc. (AMZN)
Tesla, Inc. (TSLA)
Meta Platforms, Inc. (META)
NVIDIA Corporation (NVDA)
PepsiCo, Inc. (PEP)
Costco Wholesale Corporation (COST)

History

The Nasdaq-100 Index was introduced in 1985 by the National Association of Securities Dealers (NASD) to monitor the technology sector's performance. Here is a summary of its journey:

Inception and Early Years (1985-1990): The Nasdaq-100 Index made its debut on January 31, 1985, initiated by the National Association of Securities Dealers (NASD). It commenced with a starting value of 250 points, encompassing 100 companies from diverse sectors, with a focus on technology-oriented firms. Early members included tech giants like Apple, Microsoft, Intel, Oracle, and Cisco Systems.
Dot-com Boom and Bust (1990s-early 2000s): During the late 1990s, the index soared amidst the dot-com boom. The subsequent dot-com bubble burst led to a steep drop, with the index sinking to a significant point.
Recovery and Expansion (2003-2007): Recovering from the dot-com crash, the index steadily increased in value. It expanded its scope to include healthcare, consumer services, and telecommunications companies. It achieved a new high of 2,859.12 points on October 31, 2007.
Global Financial Crisis (2008-2009): The 2008 financial crisis, triggered by the collapse of Lehman Brothers in September 2008, inflicted significant losses on the Nasdaq-100 Index.
Post-Crisis Recovery and Modern Era (2010s-2021): Following the financial crisis, the index steadily recuperated, powered by technology firms and global economic revival. Record highs were reached by industry leaders like Apple, Amazon, Google (Alphabet), Facebook, and Netflix. The COVID-19 pandemic in 2020 brought market volatility, but technology companies thrived as remote work and digital services gained prominence.

How To Trade?

Trading the Nasdaq-100 index involves a range of options to suit individual preferences and available resources:

Exchange-Traded Funds (ETFs): Invest in Nasdaq-100 ETFs that track the index's performance. ETF shares provide exposure to the Nasdaq-100 without trading the index directly.
Index Futures: Trade Nasdaq 100-index futures contracts on futures exchanges. Futures allow speculating on the index's future value without owning the underlying assets, but they come with higher risk due to leverage.
Contract for Difference (CFD): Access Nasdaq-100 CFDs through brokers. CFDs offer leverage and the flexibility to profit from rising and falling markets by speculating on the index's price movement.

Other trading avenues include purchasing Nasdaq-100 mutual funds, options, and annuities.

Examples

Some of the examples are the following:

Example #1

In 2020, during the COVID-19 pandemic, the Nasdaq-100 Index exhibited remarkable resilience and growth. Tech giants like Apple, Amazon, and Microsoft, which are prominent components of the index, benefited from increased demand for digital services and remote work solutions. As a result, the Nasdaq-100 outperformed other indices, showcasing its role as a benchmark for technology stocks and demonstrating the significance of technology companies in the modern economy.

Example #2

In 2021, the Nasdaq-100 Index reflected the impact of the global semiconductor shortage. Several of its constituents, including major chip manufacturers like NVIDIA and AMD, played a crucial role in driving the index's performance due to their central role in the tech and electronics industries. This highlighted how external factors, like supply chain disruptions, could significantly influence the Nasdaq-100, underscoring its sensitivity to the dynamics of modern technology and global markets.

Nasdaq-100 Index vs S&P 500

The Nasdaq-100 index and the S&P 500 are two prominent stock market indices in the United States that provide an overview of the stock market's performance. While they share few similarities, there are multiple differences between the two:

Basis	Nasdaq-100 Index	S&P 500
Overview	A basket of stocks listed exclusively on the Nasdaq stock exchange belonging to the 100 largest domestic and international non-financial companies based on their market cap.	A basket of large-cap US equities belonging to 500 leading companies listed on Nasdaq, NYSE, and CBOE
Composition	Consists of the 100 largest non-financial companies on the Nasdaq exchange, with a focus on technology and growth-oriented firms	Comprises 500 large-cap companies from various sectors, including technology, healthcare, finance, and industrial
Significance	The global benchmark for technology and growth-oriented stocks	A basket of large-cap U.S. equities belonging to 500 leading companies listed on Nasdaq, NYSE, and CBOE
Weighting Methodology	Follows a modified market-cap-weighted approach, where the weight of each company is based on its market capitalization	Employs market-cap-weighted methodology but incorporates additional factors such as the public float and liquidity of the companies
Sector Exposure	Majorly focused on the technology sector; other sectors involve - healthcare, basic materials, telecommunications, industrials, utilities, consumer staples, and consumer discretionary.	Diversified exposure to various sectors, including technology, healthcare, financial, consumer goods, and energy
Performance	Better performance during periods of potent growth in the technology sector	During broader market rallies, when non-technological sectors grow, the S&P 500 may perform more favorably due to its diversified composition.
Index-Linked Products	Invesco Nasdaq-100 ETF, Direxion Nasdaq-100 Equal Weighted Index Shares (NASDAQ: QQQE)	1nvest S&P500 Feeder ETF and Direxion Daily S&P 500® Bear 1X ETF
Ticker	NDX	SPX

Frequently Asked Questions (FAQs)

1. Is the Nasdaq-100 index fund good?

Investing in a Nasdaq-100 index fund can be a good choice for those seeking exposure to leading technology and growth-oriented companies. It provides diversification and tracks the performance of the Nasdaq-100, offering a way to participate in the growth of prominent tech firms.

2. Is QQQ the same as Nasdaq-100?

The QQQ, an ETF offered by Invesco, closely tracks the Nasdaq-100 Index's performance. While not identical, it provides a convenient way to invest in the Nasdaq-100, making it an efficient and accessible way to gain exposure to the index.

3. Is the Nasdaq Composite or Nasdaq-100 better?

The choice between the Nasdaq Composite and Nasdaq-100 depends on your investment goals. The Nasdaq Composite is broader, representing many companies, including smaller ones. While the Nasdaq-100 focuses on the largest non-financial firms, particularly in the technology sector. Select the one that aligns with your investment strategy and risk tolerance.