Nasdaq Smart Sectors

Nasdaq offers a robust traditional sector line-up along with a new Smart Sectors suite aimed to find those securities with the greatest potential for capital appreciation.

The proliferation of sector indexes has made it easier than ever for investors to implement sector-related strategies. The use of sector index-based strategies provides instant diversification, reducing risk compared to purchasing individual stocks. If you’re looking for exposure to a specific sector, following an index can help capture that trend efficiently without worrying about selecting specific securities in that sector.

Nasdaq provides a wide-ranging family of sector indexes based on the Industry Classification Benchmark (ICB) and designed for different purposes. The Nasdaq Global Equity family offers industry and super sector ICB coverage, and includes the U.S. All Market Benchmark, Large, Mid, and Small Cap ICB indexes. The renowned Nasdaq Biotechnology® Index is one of the most widely watched Biotech indexes and is the basis of 9 ETFs listed in four different countries.

The Nasdaq PHLX® sectors are intended to underlie tradable products like derivatives and ETFs, such as the PHLX Semiconductor Index, which is the basis of the $469 iShares PHLX Semiconductor ETF (SOXX). The PHLX indexes are designed to provide instant exposure and diversification around very specific portions of the market via core large-cap stocks and a rules-based approach. They include indexes covering housing, oil services companies, gold and silver miners, utilities, and others.

Nasdaq Smart Sectors

Nasdaq Smart Sector Indexes are designed to provide exposure to the most liquid securities in each sector then the securities are weighted using a factor based approach. Utilizing a combination of value, growth, and volatility, the index identifies names which exhibit characteristics with the greatest potential for capital appreciation. Companies are weighted by a combined factor score of the three factors The methodology ensures that the “best of breed” within each sector are over weighted.

Nasdaq Smart Sector Indexes:

Deciding which Factors to Use

Factors are any characteristic(s) linking a group of securities that is instrumental in explaining their risk and return:
ValueIncludes stocks that have low prices relative to their fundamental value
SizeIncludes smaller firms (by market capitalization) relative to their larger counterparts
MomentumReflects stocks with stronger past performance
Low VolatilityIncludes stocks with lower than average historical volatility
Dividend YieldIncludes stocks that are characterized by various financial quality metrics
QualityIncrease the visibility in the U.S. market
Access to IR ToolsIncludes stocks that have above average dividend yields

The Nasdaq Smart Sector indexes combine uncorrelated, yet complimentary price factors to weight the securities within each sector. 

1. Value
2. Growth
3. Volatility 

The factors chosen value (cash flow to price), growth (momentum), and volatility and are blended to create a single weighting score. All three are price dependent, so they are completely objective, transparent and available daily. While proven to enhance returns over a benchmark on their own, when they are blended together they have enhanced performance for particular sectors compared to the base market cap weighted benchmark.

Smart Index Construction

The unique methodology behind the index ensures that the “best of breed” within each sector is included. No other U.S. Sector index uses these factors in its methodology; rather most are market-cap weighted.

1. Select stocks from the Nasdaq U.S. Benchmark Index based on appropriate ICB sector classification
2. Rank eligible securities based on the 3 factors
    i. Value 
    ii. Growth 
    ii. Volatility

3. A combined score is calculated based upon the factors and utilized to create security weights 

Nasdaq Smart Sectors capture returns that previously were only available to active investors.

Scroll up