How and Why to Invest in the Nasdaq-100 Index

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2020 has been a tough year so far. The U.S. stock markets are in bear territory, falling more than 20% from their recent highs, and the situation is similar across global markets. Although it is hard to be courageous when stock markets are so volatile, it is time to remember that bear markets are a buyer’s market.

These rough times are an opportunity to buy stocks in companies that are fundamentally strong and are currently a victim of pessimism and near-term challenges. In the current scenario, large-cap growth companies offer good prospects. One can invest in a strong diversified portfolio of such companies by investing in the Nasdaq-100 index. Here’s why and how investors can go about doing so.

An overview of the Nasdaq-100 index (NDX)

The Nasdaq-100 is one of the world’s preeminent large-cap growth indexes. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. It is home to the four companies who have touched the trillion-dollar mark in the US: Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGGOOGL).

The prominence of these companies along with other technology leaders such as Cisco (CSCO), Qualcomm (QCOM), Intel (INTC), NVIDIA (NVDA), Micron (MU), Adobe (ADBE), Advanced Micro Devices (AMD), and Baidu (BIDU) often create an impression of it as a technology index.

While technology is a dominant segment in the index, it is well-balanced by sectors such as consumer services, healthcare, consumer goods, and industrials which constitute the other 50%. Consumer services companies account for almost a quarter of the cap weight, up from 17% a decade ago.

Within healthcare, Nasdaq-100 is home to some of the most prominent biotechnology companies such as Gilead (GILD), Regeneron (REGN), Vertex (VRTX), and Amgen (AMGN). These companies are working on cutting edge research. Recently, Regeneron Pharmaceuticals announced important advances in novel COVID-19 antibody program while Gilead has initiated two Phase 3 clinical studies to evaluate the safety and efficacy of remdesivir (investigational nucleotide analog) in adults diagnosed with COVID-19. China’s health authorities have initiated two clinical trials in patients to determine remdesivir’s potential for treatment for the coronavirus. 

If we look at current market trends, companies such as Zoom (ZM) are surging on the work-from-home model while others, such as American Airlines (AAL), and Expedia (EXPE), are struggling due to travel halt.

The index holds consumption-led companies such as Netflix (NFLX), Pepsi (PEP), Costco (COST), and Starbucks (SBUX), some of which are suffering due to supply chain bottlenecks and lockdowns while others are partial beneficiaries of the current chaos.

As we look at the larger picture, the NDX is a diversified mix of sound companies and is better positioned compared to the S&P 500 due to the negligible or complete absence of sectors such as energy and financials. One thing which is unique to this index is its focus on companies which are symbolic of innovation and future growth. Since 2008, the Nasdaq-100 has generated higher growth rates than competing indexes, such as S&P 500 Index and the Russell 1000 Growth Index.

How to buy Nasdaq-100?

While there are multiple ways (such as options, futures and annuities) which are accessible for investors at all levels to invest in Nasdaq-100, the exchange traded fund route is one of the easiest ways to gain exposure to the NDX.

The 20-year-old Invesco QQQ Trust, Series 1 ETF (QQQ) is among the oldest and popular ways of investing in the Nasdaq-100. Invesco QQQ is the second-most traded and one of the most liquid ETFs in the United States. It is the fifth-largest ETF with $76.96 billion as assets under management and has an expense ratio of 0.20%. Investors need to remember that QQQ is cap-weighted like its underlying index NDX, which means that companies with higher market capitalization enjoy a higher weightage in the index.

In contrast to QQQ, the First Trust Nasdaq-100 Equal Weighted Index Fund (QQEW) offers investors an opportunity to hold Nasdaq-100 stocks in an equally weighted manner. Its underlying index is the NDXE, which is an equally weighted version of Nasdaq-100. Currently, the highest allocation i.e. the top holding is at 1.68%. An equally weighted methodology negates the risk of concentration and impact of a sharp downward price swing of an individual stock. Launched in April 2006, the ETF has around $604.86 million as assets under management and an expense ratio of 0.6%.

Other than the regular ETFs which track its underlying index on a one-to-one basis, there are a category of riskier ETFs dubbed as leveraged and inverse ETFs, which track an index on a 2:1 or 3:1 basis and on an inverse movement basis. Some of these ETFs are:

  • ProShares Ultra QQQ (QLD)
  • ProShares UltraPro QQQ (TQQQ)
  • ProShares UltraPro Short QQQ (SQQQ)
  • ProShares Short QQQ (PSQ)
  • ProShares UltraShort QQQ (QID).

The index is accessible for investment to investors from across 27 countries through products such as:

  • iShares Nasdaq-100 UCITS ETF (Germany)
  • BMO Nasdaq-100 Equity Hedged to CAD Index
  • Amundi ETF Nasdaq-100 (France, Multiple Europe)
  • MOSt Shares Nasdaq-100 (India)
  • Guotai Nasdaq-100 ETF (China)
  • BetaShares Nasdaq-100 ETF (Australia)
  • Fubon Nasdaq-100 ETF (Taiwan)
  • NASDAQ-100 European Tracker ETF (Multiple Europe)
  • iShares NASDAQ 100 Index ETF (Hong Kong)
  • TIGER NASDAQ-100 ETF (South Korea)
  • GF NASDAQ-100 ETF (China)
  • BMO NASDAQ 100 (Hong Kong)
  • iShares Nasdaq-100 Index-HK (Hong Kong)
  • Horizons NASDAQ-100 Index ETF (Canada)

Looking beyond the near team disruptions due to the impact of the COVID-19 pandemic, the constituent companies of NDX, which are largely driven by innovation across sectors, holds a great potential to bounce back fast and strong. In words of Steve Jobs, “Innovation distinguishes between a leader and a follower.”

Disclaimer: 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. The report has been carefully prepared, and any exclusions or errors in reporting are unintentional. Fact and figures on ETFs and stocks based on March 19, 2020 data.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Prableen Bajpai

Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.

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