The Nasdaq 100 Index is a well-known stock market index that tracks the performance of the 100 largest and most actively traded nonfinancial companies listed on the Nasdaq stock exchange. It provides investors with a snapshot of the overall health and performance of the technology, manufacturing, healthcare, and other sectors. In this guide, we will delve deeper into what the Nasdaq 100 Index is, how it is constructed and weighted, and how investors can gain exposure to it.
What is the Nasdaq 100 Index?
The Nasdaq 100 Index is a benchmark index that includes some of the largest and most influential companies in the world, such as Microsoft, Apple, Amazon, Tesla, and Meta Platforms. It covers a wide range of sectors, including technology, consumer discretionary, healthcare, telecommunications, industrials, consumer staples, utilities, and basic materials. The index excludes companies in the financial sector, such as commercial and investment banks.
Construction and Weighting of the Index
To be included in the Nasdaq 100 Index, securities must be listed exclusively on a Nasdaq exchange and must be nonfinancial. The securities can include common stocks, ordinary shares, American depositary receipts, and tracking stocks. They must also have traded for at least three months on an exchange.
The index follows a modified capitalization method for construction and weighting, which takes into account the individual weights of the included companies based on their market capitalization. This method ensures that the influence of the largest companies is limited, creating a balanced representation of all members.
Nasdaq reviews the composition of the index quarterly and adjusts the weights if the distribution requirements are not met. This ensures that the index remains representative of the current market conditions.
Composition of the Nasdaq 100 Index
The Nasdaq 100 Index comprises assets from various sectors, excluding financial services. As of September 30, 2023, the index is composed of the following sectors and their respective weightings:
- Technology: 57.1%
- Consumer Discretionary: 18.73%
- Healthcare: 7.12%
- Telecommunications: 5.48%
- Industrials: 4.87%
- Consumer Staples: 4.23%
- Utilities: 1.24%
- Basic Materials & Energy: 0.96%
The top 10 companies by weight in the Nasdaq 100 Index as of September 30, 2023, are as follows:
- Apple Inc. (10.82%)
- Microsoft (9.48%)
- Amazon.com (5.30%)
- NVIDIA (4.34%)
- Meta Platforms (3.78%)
- Tesla (3.21%)
- Google (A shares) (3.14%)
- Google (C shares) (3.09%)
- Broadcom (2.97%)
- Costco Wholesale (2.17%)
Special Rebalancing of the Nasdaq 100 Index
Nasdaq recently undertook a special rebalancing of the Nasdaq 100 Index on July 17, 2023, to address overconcentration in the index and reduce its dependence on just a few large companies. According to Nasdaq’s rules, if stocks with a weight of more than 4.5% collectively account for more than 48% of the index, a rebalancing is required.
This special rebalance was triggered by a rally in tech stocks and Tesla shares, which pushed the aggregate weight of the top five companies (Microsoft, Apple, NVIDIA, Amazon, and Tesla) above the 48% threshold. The rebalancing process involved reducing the weights of these companies and increasing the weights of others like Alphabet, Meta Platforms, Netflix, and Costco.
The special rebalance will have an impact on the performance and volatility of the index and the individual stocks, as some investors may adjust their portfolios to align with the new weights. However, it is important to note that this rebalance does not affect the fundamentals or prospects of any of the companies in the index.
Investing in the Nasdaq 100 Index
While investors cannot directly invest in the Nasdaq 100 Index itself, there are several ways to gain exposure to the index’s performance. One popular method is through exchange-traded funds (ETFs), which are investment funds traded on stock exchanges that aim to replicate the performance of the index.
ETFs offer investors a convenient and cost-effective way to gain diversified exposure to the companies included in the Nasdaq 100 Index. These funds can be bought and sold like individual stocks, making them easily accessible to individual investors.
Apart from ETFs, investors can also consider investing in mutual funds, futures and options, or annuities that track the Nasdaq 100 Index. It is important to carefully evaluate the options available and consider factors such as fees, liquidity, and investment objectives before making any investment decisions.
What Makes Up the Nasdaq 100?
The Nasdaq 100 Index is made up of the largest 100 companies by modified market capitalization that trade on Nasdaq exchanges. These companies span various sectors, including basic materials, consumer discretionary, consumer staples, healthcare, industrials, technology, telecommunications, and utilities. The index provides a comprehensive representation of the market, allowing investors to gauge the performance of different sectors and make informed investment decisions.
What Is the Nasdaq 100 Used For?
The Nasdaq 100 Index serves as an important tool for investors, analysts, and policymakers to assess the performance of large-cap companies and specific sectors. It provides valuable insights into the overall health of the economy and helps investors understand the trends and dynamics within different sectors.
The performance of the Nasdaq 100 Index can be used as a benchmark to evaluate the performance of investment portfolios, mutual funds, and other financial instruments. It also serves as a reference point for analysts and researchers studying market trends and sector rotations.
What Is Nasdaq?
Nasdaq, short for the National Association of Securities Dealers Automated Quotations, is an electronic marketplace for buying and selling securities. It was formed in 1971 and was the first electronic stock market. Nasdaq is known for its technology-focused listings and is home to many prominent tech companies, including Apple, Microsoft, and Amazon.
Nasdaq manages two stock exchanges: the Nasdaq Stock Market and the Nasdaq Nordic, which comprises the stock exchanges in Helsinki, Copenhagen, Stockholm, and Iceland. It provides a platform for companies to raise capital through initial public offerings (IPOs) and facilitates the trading of various financial instruments.
The Difference Between the Nasdaq 100 and the S&P 500
While both the Nasdaq 100 and the S&P 500 are stock market indexes that track the performance of large companies, there are several key differences between them. The Nasdaq 100 includes 100 companies, whereas the S&P 500 includes 500 companies. The Nasdaq 100 can include foreign companies, whereas the S&P 500 is limited to U.S. firms. The Nasdaq 100 excludes companies from the financial sector, while the S&P 500 does not have this exclusion. Additionally, the Nasdaq 100 consists only of companies that trade on Nasdaq exchanges, while the S&P 500 includes companies that trade on all U.S. exchanges.
Conclusion
The Nasdaq 100 Index provides investors with a comprehensive view of the largest nonfinancial companies listed on the Nasdaq stock exchange. It offers exposure to a diverse range of sectors, allowing investors to gauge the overall performance of the market. While investors cannot directly invest in the index, they can gain exposure through various investment vehicles such as ETFs, mutual funds, futures and options, or annuities. Understanding the composition, construction, and rebalancing of the Nasdaq 100 Index is crucial for investors looking to diversify their portfolios and make informed investment decisions.