Rethinking Core U.S. Equity: Can the Nasdaq-100® and Select Sectors Improve Portfolio Efficiency to Form a Better Core Holding?

Executive Summary

The S&P 500 Index (SPX) has traditionally been viewed as a core equity holding.  This has been supported by its broad equity market coverage, its exposure to high-quality companies with a track record of profitability, and its compelling long-term performance record.  Indeed, its risk-adjusted performance has ranked highly when compared to the individual sector portfolios that comprise the S&P 500. 

However, as the U.S. economy has evolved from being driven primarily by physical assets and traditional industries toward one increasingly shaped by innovation, intellectual property, and other forms of intangible investments, the case for defining “core equity” has also evolved. This shift is reflected in the growing share of market capitalization and earnings represented by technology-enabled businesses, as well as the increasing importance of software, data, networks, and intellectual property across industries.

The Nasdaq-100® captures many of the largest and most influential companies driving this transition. With its exposure to globally scaled, innovative businesses and its strong long-term risk-adjusted performance record, NDX may be viewed not only as a growth allocation, but also as a potential core U.S. equity building block for investors seeking more optimized exposure to the modern economy.  

A natural, two-part question would be: is there a way to use NDX in combination with SPX sector portfolios to 1) improve the risk-adjusted performance of NDX through sector diversification, and 2) simultaneously surpass the performance efficiency of the S&P 500?   Using monthly return data over the last 23 years, we find that the answer to both questions is yes. 

Theoretical portfolios that combine NDX with additional sector allocations were able to deliver either 2.6% more return per year than SPX for the same level of risk, or 3.1% lower risk than SPX for the same level of return.  Additionally, the “optimal” portfolio (with optimal being defined as the portfolio that maximizes return per unit of risk) of NDX combined with additional sector allocations displayed higher return and lower risk than SPX, with a higher return/risk (R/R) ratio than NDX alone. 

While NDX retains a meaningful weight in the optimal portfolio, adding in traditionally lower risk sectors such as consumer staples, health care and utilities may help improve efficiency vs. NDX as a stand-alone investment.  However, it’s important to note that standalone NDX (without combining SPX sectors) continues to generate the highest returnⁱ of all combination portfolios, so while the addition of other sectors does improve the efficiency, it may come at the cost of lower returns.

Background

The Nasdaq-100 includes 100 of the largest, most innovative non-financial companies that are listed on the Nasdaq Stock Market®.  Using GICS sector classifications, the composition of NDX has historically been skewed towards information technology, communication services, consumer discretionary and health care stocksⁱⁱ (see Chart 1).

Chart 1

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^{Source: Nasdaq Global Indexes, Bloomberg.  Annual data from December 31, 2009, through December 31, 2025}

When we compare the sector weights of NDX to SPXⁱⁱⁱ (using GICS sector classifications), an interesting pattern emerges. The differences in sector weights have been steadily declining over time. While sector differences between NDX and SPX are closing, they are still somewhat significant but not as widespread, with technology by far the biggest NDX overweight, and financials the biggest underweight, followed by industrials.

Chart 2

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 ^{Source: Nasdaq, Bloomberg. Data as of December 31 (or last trading date) of each respective year.}

As innovation and intangible investment have become increasingly important drivers of U.S. economic growth, the Nasdaq-100 Index — a benchmark of many of the largest, most innovative Nasdaq-listed companies — has moved beyond serving as a leading growth allocation, and closer to a potential core equity building block. Over time, the S&P 500 has seen an increase in its exposure to technology and innovation-oriented companies as those market caps have swelled, leading to greater similarity between the two benchmarks, and reinforcing the case for evaluating NDX within the core equity toolkit.^iv Nowhere else is this more evident than in reviewing the 10 largest individual constituents of the S&P 500 in 2026, nine of which are Nasdaq-100 companies. Yet, investors that are accustomed to looking at core allocations that provide material exposure across all sectors of the economy may find the Nasdaq-100 lacking, especially in relation to its wholesale exclusion of financials. When we look at the Nasdaq-100 today as a potential “modern core anchor”, there appear to be opportunities to improve the return per unit of risk through diversification via sector overlays.

Data:

We used monthly total return index levels (including dividends), from July 31, 2003^v,vi through July 31, 2026, for the indexes tracked by the Select Sector SPDR ETFs. For NDX, we used the monthly returns of XNDX®, the total return version of NDX. See Appendix for the list of Sector Select ETFs and their underlying indexes.

Historical analysis:

The analysis begins with NDX as the starting point and adds distinct combinations of sector portfolios to achieve various objectives from minimum risk, maximum return per unit of risk, and more efficient portfolios than SPX. Given the historically overweight exposure of NDX to tech, the technology sector was excluded as a possible portfolio addition to reduce overlap.

We used monthly index total returns to calculate average annual returns, compound annual growth rates (CAGR), annualized standard deviations, correlations, and a covariance matrix^vii.

Taking a unilateral view of each asset, NDX has had the highest CAGR per unit of standard deviation over this time period (see Chart 3). This supports the view that NDX should not be assessed only as a high-growth satellite allocation; historically, it has also delivered attractive compensation for risk relative to broad-market and sector alternatives.

Chart 3

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^{Source: Nasdaq, Bloomberg. Data is from July 2003 to July 2026.}

To explore whether we could improve on the NDX return/risk ratio by including additional sectors, we used an optimizer to calculate the long-only, minimum variance portfolio across the sector indexes and NDX.  This becomes the anchor point of the Efficient Frontier^viii (see the green point in Chart 4). We then find each portfolio that has the maximum average annual return for each 1% incremental level of standard deviation.

Chart 4

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^{Source: Nasdaq, Bloomberg. Data is from July 2003 to July 2026. Results are back tested using hypothetical portfolios.}

The portfolio that has the highest ratio of average annual return to standard deviation (the Max Return/Risk) is denoted in yellow. There are several interesting observations from the efficient frontier:

1. All the sectors fall inside (i.e. below) the frontier.  Yet, we are still able to create more efficient portfolios that include several of these sectors.
2. The S&P 500 also falls inside the efficient frontier indicating that an opportunity exists to achieve lower risk and higher return by including NDX as part of a reengineered core portfolio that includes incremental sector exposures.
3. The optimal portfolio had lower risk and higher return than SPX.
4. SPX: Same Return/ Lower Risk had the same return as SPX but had an average annual standard deviation that is 3.1% lower than SPX.
5. SPX: Same Risk/ Higher Return had the same risk as SPX but had an average annual return that is 2.6% higher than SPX.

The weights of the optimal portfolio can be seen on the left bar in Chart 5. NDX has a weight of 35.7% while utilities, consumer staples, healthcare and energy have weights of 33.3%, 22.4%, 6.1% and 2.4%, respectively. To see the sector allocations in their entirety, inclusive of NDX overlap, we take the NDX weight of 35.7% and distribute it across the sectors (using the NDX average annual GICS sector weights from December 2009 through December 2025.  This provides the “look-through” weights as shown in the right bar of Chart 5. The utilities, consumer staples, information technology, health care, and communication services weights become 33.5%, 24.2%, 16.4%, 9.6% and 6.8% The remaining weights are distributed across consumer discretionary, energy, industrials, financials and materials. The tech allocation is the result of a 35.7% allocation to NDX, which had an average weight of 46% in “information technology” as defined by GICS. 

It is interesting to note that the optimal portfolio has a 0% allocation to financials.  This is attributable to financials having the second lowest return/risk ratio (as seen in Charts 3 & 4). For investors accustomed to always including financials in their portfolio core, the Nasdaq-100’s methodological limitation towards non-financial stocks appears objectively defensible from a classic return/risk optimization perspective. Investors should thus reevaluate the necessity of “always-on” financials exposure in lieu of a more tactical approach that examines the historical record of the sector’s performance correlations with, for example, more or less favorable macroeconomic factors or regulatory regimes, which is beyond the scope of this paper. 

Chart 5

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^{Source: Nasdaq.  Data is from July 2003 to July 2026. Results are back tested using hypothetical portfolios.}

The portfolio that produced the same return with lower risk relative to SPX would have the most meaningful exposures across NDX, consumer staples and utilities with smaller allocations to health care and energy. See Chart 6.

The portfolio that produced a higher return than SPX with the same risk would have allocated nearly two-thirds in NDX and 30% in utilities with a small allocation to energy. See Chart 7.

Chart 6

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Chart 7

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^{Source: Nasdaq.  Data is from July 2003 to July 2026. Results are back tested using hypothetical portfolios.}

Chart 8 shows the sector weights across the efficient frontier.  As you move further up the frontier (and move from left to right on the X-axis), taking on more risk for each unit of return, the weight in NDX continues to increase to a high of nearly 100%.

Chart 8

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^{Source: Nasdaq.  Data is from July 2003 to July 2026. Results are back tested using hypothetical portfolios.}

Conclusion:

SPX has traditionally been the leading core U.S. equity position.  However, as the modern economy has become increasingly driven by secular, innovation-fueled growth, the gaps between the sector weights of SPX and NDX have started converging.  This creates an opportunity for NDX to step into a more meaningful role as either a core complement to SPX, or a standalone core equity “anchor” position. While NDX remains a compelling growth-style allocation, pairing it with select defensive sectors may improve portfolio efficiency vs. SPX by decreasing risk, further enhancing its status as a core position. We find that including consumer staples and utilities helps to improve the return to risk ratio vs. SPX, though that may come at a cost of lower returns compared to NDX alone. Each investor must ultimately decide the optimal tradeoff between performance, risk and sector diversification. Multiple pathways beyond an all-in S&P 500 allocation exist for those who are open to reconsidering the meaning and utility of a core equity exposure.

Appendix