U.S. equity indexes have performed quite well through August. The Nasdaq-100 Index (NDX) is higher by nearly 43% year-to-date (YTD) while the S&P 500 has gained about 18% and the Russell 2000 and Dow Jones Industrial Average have added 8.72% and 4.79% respectively.
The broad-based advances have been primarily led by a handful of constituent names, specifically Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), NVIDIA (NVDA), Tesla (TSLA) and Meta Platforms (META). Collectively, they have been referred to as the “Magnificent Seven” and the overarching theme is predicated on the future impact of artificial intelligence (AI).
Here’s a side-by-side comparison of the top 10 holdings in the NDX and SPX, including the relative weights in each index. The “primary ingredients” in the indexes have significant overlap and include this year’s top performers. The performance difference is largely explained by the higher weighting of those names in the NDX, as well as the drag of financials and energies on the SPX.
I was curious if the year ended in August, how the relative performance would stack up to previous full calendar years. The results were somewhat surprising. For example, this would be the ninth time since 1985 that the NDX gained 40% or more in a year. By contrast, the SPX has never advanced that much over the same period.
That reality reminded me of a prescient comment Kris Sidial made during a February (2023) interview on TradeTalks. In short, he explained the potential for asymmetric right tail (10 delta long-dated NDX call options) payoffs if market sentiment about a tech recovery took root. Sentiment certainly shifted.
In fairness, the SPX added between 20% and 39.99% more often than the NDX over the past 38 years. In total, SPX annual performance fell between those parameters thirteen times, whereas the NDX distribution is only six times.
This would be a typical year for the S&P 500. A 10% - 19.99% gain happened ten times previously and 2023 could be the eleventh. As a reminder, the SPX is plus ~18% through August.
Let’s also address the left tail, or significant downside occurrences. The NDX fell 30% or more five times. The worst annual performance happened in 2008 when it fell by 41.89%. That same year, the SPX declined 37%.
So, the year-to-date performance for the two major equity indexes are impressive, but not outliers. A 40% plus advance for the NDX would fall on the right side of the distribution, but there were similar years in the mid-90s. There were also 85.3% and 101.95% annual gains in the late 90s.
If you’re concerned about a potential drawdown during the final four months of the year, there are a variety of Nasdaq-100 Index options (NDX, NQX, XND) that could be used to potentially manage your exposure. To learn more, email us at IndexOptions@nasdaq.com.
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Kevin Davitt
Nasdaq
Kevin Davitt is the Head of Nasdaq’s Index Options Content. Kevin spent years focused on options education with an index emphasis at Cboe Global Markets. Prior to his exchange work, Kevin traded index, equity, and commodity futures and options as a market maker at a variety of well-known firms. Davitt is a graduate of Marquette University. He’s a proud Evans Scholar alum and enjoys reading, live music, running and coaching youth baseball.
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