More investors than ever are interested in stock market
indexes, largely due to the popularity of exchange-traded funds
and the various benchmarks they track. Yet while many people know
Dow Jones Industrial Average
and the broad-based
, other market indexes don't get as much exposure. The
is one of those indexes, and though many people think of it as a
niche benchmark for technology stocks, it's actually composed of
a much more inclusive set of companies. Let's take a closer look
at the Nasdaq 100 and how it can help you in your investing.
What is the Nasdaq 100?
The Nasdaq 100 is an index that includes 100 of the largest
companies listed on the Nasdaq Stock Market. Unlike most
other major benchmarks, the Nasdaq 100 specifically excludes
companies from the financial industry, but the other sectors of
the market are well represented in the index.
Over the years, though, the Nasdaq 100 has gained a reputation
for being a technology index. That's largely because for a long
period of time, the young technology companies that eventually
became the titans of the industry nearly universally chose to
list on the Nasdaq rather than the New York Stock Exchange. By
contrast, the NYSE has done a good job of attracting the largest
companies in most other sectors, thereby leaving the Nasdaq 100
overweighted in tech stocks. Technology makes up well over half
of the total value of the Nasdaq 100, but consumer and health
care stocks also have respectable weightings in the index.
What is the history of the Nasdaq 100?
Because of its connection to the technology industry, the
history of the Nasdaq 100 has largely mirrored that of tech
stocks. The tech boom of the late 1990s vaulted the Nasdaq 100 to
much stronger returns than the broader market, and the subsequent
plunge in tech stock prices hurt the index far worse than the Dow
or the S&P 500.
The Nasdaq 100 was established in early 1985 as part of the
Nasdaq Stock Market's efforts to become more competitive against
the NYSE. Unlike the Dow and S&P 500, which reached several
new record highs in 2006-2007 and 2013-2014, the Nasdaq 100 has
had to work much harder to even approach the heights it hit in
How many companies are in the Nasdaq 100?
Given the index's name, this might seem like a silly question.
The Nasdaq 100 does in fact usually include 100 stocks. But
there's a twist that makes the answer a bit more complicated.
Ordinarily, the Nasdaq is diligent in keeping the Nasdaq 100
up to date. When companies go through mergers or reorganizations
or decide to list on a different exchange, the Nasdaq 100 index
is quickly updated to restore its component count to 100.
In some cases, though, the Nasdaq 100 will actually have more
than 100 stocks. For instance, when
split its shares into two different classes, both classes of
were included separately within the Nasdaq 100, giving it 101
components. In the Nasdaq 100's subsequent quarterly rebalancing,
however, the index kept only Google's Class C shares, adjusting
its weighting accordingly.
Why invest in the Nasdaq 100?
The top components in the Nasdaq 100 are a "who's who" of
leading global companies, with particular emphasis on technology
and biotechnology stocks among the 15 largest components. The
Nasdaq 100 is a truly global index: For years, it hasn't
considered the country in which a company is based as part of its
criteria for inclusion. Traditionally, technology and biotech
have been among the highest-growth areas of the market, and that
has made the Nasdaq 100 suitable for aggressively minded
investors with tolerance for above-average risk. More recently,
though, some of the top stocks in the Nasdaq 100 have appeared
almost value-priced, encouraging stronger consideration from more
conservative investors as well.
It's important to understand, though, that investing in only
the Nasdaq 100 leaves a huge gap in your stock market exposure.
Many of the best-known companies in the market list their shares
on the NYSE, and a Nasdaq-only portfolio will leave those stocks
out of your portfolio. So, while the Nasdaq 100 is fairly broad,
it isn't as balanced as some of its counterparts, and it
therefore serves best as a single piece of your overall
investment strategy, rather than as your sole investment in the
That said, the Nasdaq 100 is a great place for investors to
look for promising investments, either as an index to track
through a suitable exchange-traded fund or as a starting point
for doing research on individual stock ideas. With many investors
seeing huge long-term opportunities in the technology industry,
following the Nasdaq 100's movements will keep you informed about
what's happening in tech and what impact the industry is having
on the stock market more broadly.
Nasdaq 100: Investing Essentials
originally appeared on Fool.com.
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