With an impressive roster featuring names like Amazon, Apple, Costco, Celgene, Starbucks, Tesla, Mylan, Pepsi, Alphabet, Facebook, Cisco, Intel, Microsoft, Adobe, Netflix, NVIDIA, Gilead, and Amgen as its constituents, the Nasdaq-100 Index brings together innovation, high-growth, diversity, global-appeal and liquidity in one basket which makes it ideal for any investor's core portfolio.
Here’s a closer look at the Nasdaq-100 Index and ways to invest in it.
Launched in 1985, the Nasdaq-100 (NDX) is a modified capitalization weighted index that tracks the largest non-financial companies listed on the Nasdaq Stock Exchange. The presence of some of the best-known technology companies has resulted in the index being perceived as the “technology” index.
But in reality, NDX has almost 50% exposure to other sectors such as consumer services, wholesale and retail trade, and biotechnology. The weightage that each company in the index is based on its market capitalization and currently the top 10 heavy-weights represent roughly 50% of the index.
Over the fifteen years, from December 2003-2018, companies constituting Nasdaq-100 registered a compounded annual growth rate of 22% in earnings, 13% in revenue and 29% in dividends paid. It is not surprising that Nasdaq-100 companies are at the frontline of innovation with an average Nasdaq-100 company spending an average of $1.7 billion per year on research and development, which is more than double the average spend by an S&P 500 company.
The popularity of NDX is reflected by the current value of exchange-traded products that are linked to the index which exceeds $70 billion while the notional value of Nasdaq-100 index-tied derivatives is more than a whopping $1 trillion.
Among the oldest and most popular means to take exposure to Nasdaq-100 is the Invesco QQQ (QQQ) which is celebrating its twentieth year since inception. Fondly known as “The QQQs”, the Invesco QQQ ETF can boast being the second-most actively traded ETF in the U.S., and currently the fifth largest ETF by assets.
It has exposure to eight sectors, primarily information technology (43.9%), communication services (22.18%), and consumer discretionary (16.87%). These make up to 82.95% of the portfolio. The fund’s portfolio is composed of 103 stocks with Microsoft, Amazon, Apple, Facebook, Alphabet, Cisco, Intel, Comcast, PepsiCo as the top ten holdings making up 54.87% of the portfolio.
Investors need to remember that QQQ is cap-weighted like its underlying index NDX which means that companies with higher market capitalization enjoying a higher weightage in the index. The ETF has an expense ratio of 0.20% and manages assets under management worth $69.53 billion. The fund has posted 15.76% returns year-to-date (YTD).
Investors who are looking to hold to same basket of NDX stocks in an equally weighted manner can explore the First Trust Nasdaq-100 Equal Weighted Index Fund (QQEW), which tracks an equally weighted version of NDX. The NDXE tracks the same stocks in an equally-weighted manner with each component of the Index have a roughly 1% weightage. The current portfolio reflects the highest allocation of 1.25% to Qualcomm while PepsiCo is the tenth stock holding with 1.14% allocation.
Launched in April 2006, the ETF has around $699.4 million as assets under management, an expense ratio of 0.6% with 15.48% as year-to-date returns. The fund totally negates the risk of concentration and caps the impact a sharp price swing of an individual stock.
The next set of ETFs providing exposure to Nasdaq-100 are the leveraged ETFs which track an index on a 2:1 or 3:1 basis unlike a regular ETF that tracks an index on a one-to-one basis. The first fund is the ProShares Ultra QQQ (QLD) which seeks two times (2x) the performance of its underlying index—Nasdaq-100 on a single day while the ProShares UltraPro QQQ (TQQQ) aims to triple (3x) the performance of the index on a single day using derivatives and debt to amplify the movement.
Launched in 2006, the ProShares Ultra QQQ has $1.81 billion as assets and has posted 30.45% YTD returns. The ProShares UltraPro QQQ was launched in 2010. Today, it has assets worth $3.6 billion and has delivered 46.22% YTD returns. In the category of inverse ETFs, ProShares Short QQQ (PSQ) seeks a negative 1x times return of the index for a single day.
Investing opportunity in the Nasdaq-100 isn’t limited to U.S. investors; there are 27 countries where products tied to Nasdaq-100 are available to investors such as the BMO Nasdaq-100 Equity Hedged to CAD Index in Canada, iShares Nasdaq-199 UCITS ETF in Germany, Amundi ETF Nasdaq-100 in France, MOSt Shares Nasdaq-100 in India, Guotai Nasdaq-100 ETF in China, and BetaShares Nasdaq-100 ETF in Australia.
Return, portfolio and assets based on factsheets, and fund websites. The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration.