Markets

New White Paper Available on the Nasdaq-100: The Leader in Large-Cap Growth Indexes

By Jeffrey W. Smith, Nasdaq Economic Research and Efram Slen, Nasdaq Global Indexes

On January 31, 1985, the Nasdaq-100 index was launched. Since that time, it has become one of the most widely followed stock indexes in the world. The Nasdaq-100 helps guide the investment community on general trends in share prices. Beyond this important informational role, the index has two primary objectives: (1) to focus investor attention on the index’s 100 companies and (2) to provide a basis for investable products. Nasdaq has achieved these objectives with remarkable speed and success. Products tied to the Nasdaq-100 are now available in 27 countries, more than $50 billion of investments in exchange-traded products are tied to the index and derivatives tied to the index have a notional value of over $1 trillion.

HISTORY

The Nasdaq-100 index was one of two indexes that Nasdaq launched in 1985. One index was launched to focus on the financial companies listed on Nasdaq (Nasdaq Financial-100) and the other to focus on the non-financial companies (Nasdaq-100). These indexes were intended to serve as the basis for possible index futures contracts to be traded on the Chicago Board of Trade. At that time, interest was more centered on the financial companies listed on Nasdaq, so the initial focus was on the Nasdaq Financial-100. However, the non-financial Nasdaq-100 index has garnered more attention over the years.

The Nasdaq-100 should not be confused with the Nasdaq Composite index. The latter was launched in conjunction with the start of the Nasdaq Stock Market in February 1971. The Composite is made up of all Nasdaq-listed common stocks, the number of which has varied substantially over the years.

Interestingly, it is the Nasdaq Composite—often referred to as “the Nasdaq”—that receives greater prominence in the media, alongside the Dow-Jones Industrial Index and the S&P 500. However, the Nasdaq-100 is the index that has become the basis for a myriad of investable products, a point that will be covered extensively in our new white paper.

At its inception, the Nasdaq-100 was designed as a market capitalization-weighted index.1 This means that the importance or “weight” of a given component was proportional to its market cap (current price multiplied by total shares outstanding). The index was priced by continually updating the sum of the market caps of the 100 components and dividing this sum by a divisor. The divisor was set at launch so that the index had an initial value of 250, and was periodically updated to account for changes to the index composition in line with standard practice. At the end of 1993, the index was reset to one half its current value — in essence a two-for-one split. Thus, the split-adjusted initial value of the index is now 125.

In November 1998, in order to make the Nasdaq-100 suitable for the basis of an exchange-traded fund (ETF), the index weights were modified away from market cap weights in a special rebalance. These modifications were needed to ensure that the ETF would meet the diversification standards required by the IRS for registered investment companies. In May 2011, the index underwent a second special rebalance that resulted in the index share multipliers being set to one. Greater detail on the index’s modified market cap method can be found here.

As indicated by the index name, the companies are fixed in number to 100. The fundamental determinant of inclusion is that the issuer be a non-financial company listed on the Nasdaq Stock Market. Whether the issuer is domestic or foreign is not a factor.2 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 were carried out at various points. However, since 1998, the rebalancing has been carried out annually on the third Friday in December. The additions and deletions are wholly determined by the market cap rankings. There is no committee making membership determinations, as is the case with other well-known indexes. Indeed, investors determine the membership of the Nasdaq-100.

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Nasdaq® is a registered trademark of Nasdaq, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

Footnotes:

  1. A complete discussion of the index methodology for the Nasdaq-100 is available on the Nasdaq index website: https://indexes.nasdaqomx.com/docs/methodology_NDX.pdf.
  2. There are a number of additional technical requirements that each component must satisfy. For example, each issue must have average daily volume of 200,000 shares per day or more. In addition, its index weight must be greater than 0.1%.

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


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