Since its inception 30 years ago, the Nasdaq-100 index has become one of the most widely followed stock indexes in the world. In recognition of the Nasdaq-100’s 30th anniversary, the Nasdaq (NDAQ) research team took a detailed look at this iconic index. The findings are outlined here.
The index includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. Considered a premier large-cap growth index, the Nasdaq-100 plays a crucial role informing the investment community of performance trends for leading non-financial companies and perhaps, more importantly, provides a basis for numerous investable products. Approximately $50 billion in exchange traded products (ETPs) are benchmarked to the Nasdaq-100.
Throughout the past three decades the Nasdaq-100 has evolved from the industry’s “Technology Index” into a leading barometer for strong, growth companies at the forefront of innovation. Companies included in the Nasdaq-100 have helped drive the modern economy and the evolution of the Index, and is a reflection of how the business world has shifted in the 21st century.
When launched in 1985, the Nasdaq-100 was intended primarily to showcase the top stocks listed on The Nasdaq Stock Market. It was one of two indexes launched at that time (the other being the Nasdaq Financial-100) intended to create a subset of the Nasdaq Composite Index to better support creation of derivative trading instruments such as options and futures.
The Nasdaq-100 was designed as a market capitalization-weighted index, meaning the weight of a given component or company is proportional to its market cap. As indicated by the index name, the number of companies is set at 100. Since inclusion is based on rankings tied to ever-changing market capitalization, the components are periodically reconstituted. In its early years, the addition and removal of components was carried out at various points in time. That changed in 1998, when rebalancing started occurring on an annual basis in late December of each year. The additions and deletions are wholly determined by the market cap rankings, which is why many experts have stated that “investors determine the membership of the Nasdaq-100.” There is no committee making membership determinations, as is the case with other well-known indexes.
From the launch of the Index on January 31, 1985, to the end of 2014, a total of 448 stocks have been members of the Nasdaq-100 at one time or another. Of the original members at launch, seven are still in the current index: Apple (AAPL), Costco (originally Price Club) (COST), Intel (INTC), KLA-Tencor (KLAC), Micron Technology (MU), PACCAR (PCAR), and Seagate Technology (STX). In recent years, on average, between seven and 15 stocks are added or removed from the index each year, most of which occur at the annual rebalance date.
Today’s Nasdaq-100 is considered a large-cap index; however, that was not always the case. Taking a look back at the market cap of index components, one can clearly see the rapid growth in company size from 1985 to today.
Since the index is made up of 100 companies, it is easy to calculate the average size of each. At launch, this figure was only about $580 million, compared with an average value of about $48 billion as of December 31, 2014, approximately an 80-fold increase. In the early days, Nasdaq was in the process of moving beyond a trading utility for non-listed OTC stocks into a distinctly recognized and branded stock market. Companies listed on Nasdaq tended to be fairly new and smaller in size, compared to the companies on NYSE or AMEX. Nasdaq's largest component was a relatively new company, Intel (IPO in 1980), with a market cap of $3.5 billion. The second and third largest were MCI and Apple, with market caps of $2.3 billion and $1.8 billion, respectively. The smallest components had market caps in the range of $200 million. (By contrast, the smallest issuers in the index as of December 31, 2014 had market caps exceeding $7 billion.)
More than Technology
It is no secret that the Nasdaq-100 is commonly viewed as the “Technology Index.” In 1985, Technology was the largest, single Industry Classification Benchmark (ICB) in the Nasdaq-100, but the 23 Technology components only made up 25% of the market cap of the index. Technology was followed by Consumer Services at 21% and Industrials at 15%. The following table shows the percentage of index weight made up by Technology stocks, as well as the second largest industry by weight over the years.
At the beginning of the 1990s, the Technology weight had increased to 31%, and by the middle of the decade, when the tech boom was well underway, it was up to 57%. November 1998 is noteworthy for two reasons: the continued acceleration of the bull market and the special rebalance of index weights mentioned above. At that time, Technology stocks accounted for 70% of the market cap of the index. The rebalancing reduced that weight to 61%, the value shown in the table. By the start of 2003, the market bubble had burst, but the weighting of Technology stocks remained high. The sector that saw a major decline was Telecom, which experienced a dramatic shift from about 15% down to 2% of the total weighting.
The current index is still solidly Technology weighted, led by issuers such as Apple, Microsoft (MSFT), Google (GOOG), Intel and Facebook (FB). Still, the Nasdaq-100 is by no means a pure technology index. In fact, the current technology weight is comparatively low by historical standards. Some of the top non-technology components include:
- Biotech: Gilead Sciences (GILD), Amgen (AMGN), Celgene (CELG)
- Retail: Amazon (AMZN), Starbucks (SBUX)
- Media: Comcast (CMCSA), Twenty-First Century Fox (FOX)
- Industrials: Tesla (TSLA), ADP (ADP)
A Boon for Investors
Nasdaq, itself a relatively new market, is generally thought of as the home for younger, growth-oriented companies. For example, 25% of the index weight for the Nasdaq-100 is from components incorporated before 1985. Half the index weight is from components incorporated after 1993, and 25% of the weight is from companies incorporated after 2000. The following table shows summary statistics for the three-year average revenue growth. The sales growth of the Nasdaq-100 components is higher on average than that of the S&P 500 and the Dow Jones Industrial Average (DJIA), but there is much more variability among these components.
But, what does this all mean for the end investor? While the Nasdaq Composite Index is more widely cited in the media as a standard benchmark, the Nasdaq-100 is much more widely used as the basis for tradable products. The index has been specifically structured to promote the creation of tradable products in two ways. First, the index has a comparatively small number of components, each of which is a highly liquid security compared with indexes of 500 or 2000 components. Second, to meet diversification standards, the weighting system uses an as-needed modified market cap approach to prevent a single stock or group of stocks from having too much weight.
In the late 1990s, Nasdaq began to consider the possibility of developing an exchange traded fund (ETF) patterned after the successful SPDR S&P 500 ETF that was launched in 1993. Following a slight change in the index’s methodology due to tax regulations to support financial products, Nasdaq introduced the QQQ ETF in March 1999. At launch, the Nasdaq Stock Market was the ETF sponsor, a role that would be transferred to Invesco PowerShares in 2007. The QQQ ETF experienced astonishing growth during its first few months of operation, a clear sign showcasing investor demand for accessing a highly-liquid basket of Nasdaq companies as well as a harbinger of the forthcoming growth in the number of exchange traded products.
On March 10, 1999, QQQ was launched with a per-share net asset value of about $100. At the close of that day, the fund had about $15 million in assets. By the end of March that figure had risen to $658 million. “The Qs,” as it had become known, surpassed $1 billion by the middle of April and rapidly grew to over $2 billion by the middle of August. By the time of the market peak in March 2000, fund assets reached $10 billion. The ETF did a 2-for-1 split at that time, an interesting irony in light of the forthcoming market drop.
The fund grew rapidly from fall 2000 through spring 2001 in spite of the market meltdown occurring at the time. It may be conjectured that the demand from investors for the ETF was far beyond that as a buy-and-hold investment vehicle. The ETF ended up being used as a hedging or speculation vehicle for traders wanting exposure to “tech” stocks. Evidence in this regard can be seen by looking at the “turnover,” defined as the dollar value of trading divided by the value of the fund. From September 2000 through April 2001, the daily turnover of the ETF averaged about 17%, an astonishingly high number for a single security. (By comparison, the daily turnover of the most active common stocks may average only 1-2%.) It is clear that QQQ, as has been the case for some other ETFs, has become a useful trading vehicle as well as investment vehicle.
Currently, there are 46 ETPs tracking the Nasdaq-100 accounting for approximately $50 billion in assets. These products support a wide variety of investment objectives and range from using different index weightings, leveraged strategies, and derivatives and can be found in 13 countries including China and Singapore. The index has truly become a global staple of the financial markets, showcasing the enduring relevance of a rules-based benchmark that tracks innovative, growth-oriented companies.
Going forward, investors can expect to see new products that are tied to the index, particularly as the ETF industry continues on a path of rapid expansion to one day potentially rivaling the asset base of mutual funds. And, just as the index has evolved into the world’s preeminent large cap growth index over the past 30 years, the Nasdaq-100 will continue to be home to companies at the very forefront of their industries for decades to come.
Jeffrey W. Smith and Efram Slen contributed to this article, which was originally posted to Forbes.com. A complimentary download of the Nasdaq-100 white paper is available at www.nasdaqomx.com/nasdaq-100.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.