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What is the NASDAQ 100 INDEX?

Created in 1985, the NASDAQ 100 Index (NDX) has become a recognized global large-cap growth index of great prominence. It’s one of the most popular securities indexes in the world, comprising 103 of the largest, most actively traded U.S. and international non-financial companies on the NASDAQ stock exchange. The companies in the index include players in the retail, biotechnology, industrial, technology, and health-care sectors. Notably, the NDX gives investors access to global securities and markets in one basket.

The companies selected for the NDX are chosen based on their market cap, though the index adjusts its weighting to make sure that its largest companies don’t have too much influence on its overall performance. To reflect the current economic climate, market cap weightings are reviewed regularly and adjusted if the existing structure doesn’t meet the index’s distribution requirements. In February 2018, the NDX’s market cap exceeded US$7 trillion.

Tech stocks provide the largest component, at 54% of the Nasdaq 100 index. The second largest sector, at 25%, is consumer services which includes restaurant chains, retailers, and travel services. The balance of the NDX includes health-care, industrial, and telecommunication companies.

To be eligible for the NDX, companies must meet certain criteria. Among other rules, they have to be exclusively listed on Nasdaq’s Global or Global Select markets (though the rules make an exception for companies that have also been listed on another exchange for the past 15 years). These companies can’t currently be in bankruptcy, and they can’t have financial statements that auditors haven’t certified. They can’t be brand new; they have to have been listed on the Nasdaq, NYSE, or CBOE for at least three full months. And they can’t be in the middle of any transaction or agreement that would end their eligibility to be part of the index.

The companies with the 25 biggest market caps on the NDX are:

  1. Microsoft Corp. (MSFT)
  2. Apple Inc. (AAPL)
  3. Amazon.com Inc. (AMZN)
  4. Facebook Inc. (FB)
  5. Alphabet Inc. (GOOG)
  6. Alphabet Inc. (GOOGL)
  7. Intel Corp. (INTL)
  8. Cisco Systems Inc. (CSCO)
  9. Comcast Corp. (CMCSA)
  10. Pepsico Inc. (PEP)
  11. Netflix Inc. (NFLX)
  12. Adobe Inc. (ADBE)
  13. Amgen Inc. (AMGN)
  14. Broadcom Inc. (AVGO)
  15. Paypal Holding Inc. (PYPL)
  16. Texas Instruments Inc. (TXN)
  17. NVIDIA Corp. (NVDA)
  18. Costco Wholesale Corp. (COST)
  19. Booking Holdings Inc. (BKNG)
  20. Starbucks Corp. (SBUX)
  21. Gilead Saenil Inc. (GILD)
  22. Charter Communications Inc. (CHTR)
  23. Mondelez International Inc. (MDLZ)
  24. Walgreens Boots Alliance Inc. (WBA)
  25. Biogen Inc. (BIIB)

Drawbacks of the NASDAQ 100 Index

 There is no perfect securities index, regardless of how well it may perform over time. The largest companies in the NDX affect the index more than the other companies, even though the market cap-adjusted weightings somewhat mitigate their influence. Consequently, they affect the performance of the NDX more than the other companies in the index.

Indeed, the NDX is more volatile than the S&P 500 because so much of it comprises tech companies, which lend the index both their renowned high growth and their big swings, up and down. During bull markets, the NDX historically outperforms the S&P 500 (the 1990s and post-2008 markets). However, in bear markets, the S&P 500 tends to outperform the NDX (the early 2000s, 2008 financial crisis).

Differences between the NASDAQ 100 Index and the S&P 500

 The two indexes are weighted differently, and they do not track the same types of companies. For example, the S&P 500 tracks the 500 largest publicly traded stocks in the USA. Moreover, the companies on the S&P 500 represent all sectors of the American economy. In addition to its more narrow focus, the NDX generally excludes financial companies from its basket.

Which index is better?

Perhaps the best recommendation for the NDX is that it contains U.S. companies and companies from 27 foreign countries. It allows investors to hedge their domestic securities bets and to gain exposure to international high-performing companies. Lastly, although the financial industry significantly affects all other industries, there are investors who may choose to avoid it because of its recent problems.

But given current data, there is no clear advantage to an investor choosing the NDX over the S&P 500, or vice versa. While the NDX has outperformed the S&P 500 in recent years, it is unlikely to continue to do so in a bear market – and eventually, the market will become bearish.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alisa Hopkins doesn’t own shares in any companies mentioned.