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The Nasdaq-100 and Different Ways to Invest: What to Know .

The Nasdaq-100 Index (NDX) has entrenched itself as a premier large-cap growth index

The Nasdaq-100 and Different Ways to Invest: What to Know

The Nasdaq-100 Index (NDX) has entrenched itself as a premier large-cap growth index. Buttressed by technology companies that have flourished in the internet age — including Google, Facebook, Amazon and Apple — the Nasdaq-100 has generated incredible gains since its inception in 1985. An initial market cap of $58 in February of that year, comprising only 3 percent of the total NYSE market cap, NDX has grown to $6.5 trillion. By October 2017, the Nasdaq-100 represented a quarter of NYSE market cap.

For a deep dive into the performance, fundamentals and characteristics of the NDX, download the white paper here.

It was around the beginning of the millennium that the Nasdaq-100 really took off. As technology companies — the most represented sector — prospered with the digital revolution, so did the NDX. Since 2003, the Nasdaq-100 has posted compound annual growth rates (CAGR 1) of:

  • 24 percent in earnings
  • 14 percent in revenue
  • 20 percent in dividend value
  • 11 percent in price/earnings

The Nasdaq-100 has outperformed the S&P 500 (SPX) in each of those categories over the same time, with the gulf widening recently. Yet it's not just technology companies driving the NDX to new heights.

Though Cisco, Microsoft, Adobe and Intel all belong to the Nasdaq-100, a diverse swath of leading companies and cornerstone corporations from all industries are also represented, including: Amgen, Tesla, Costco, Mylan, Kraft-Heinz, Hasbro and Walgreens. The broad representation has powered gains, which in turn has driven investor interest.

Investments flow to NDX-tracking ETFs

Just as the Nasdaq-100 is built on diverse components, there are a variety of products that track the NDX or are associated with it. Many such options are Exchange-Traded Funds (ETFs), which can deliver investors exposure to the top nonfinancial Nasdaq-listed companies in a single share, as well as the overall gains the index has made.

The popularity of such instruments has led to over $60 billion being invested in ETFS that track the NDX, which themselves are available in 27 countries as of 8/31/2018.

As more dollars are directed at indexing, investors looking for ways to access the gains of the Nasdaq-100 have a veritable menu to choose from. Each ETF can have its own unique strategy regarding the NDX, like whether it replicates the NDX and its market cap or takes a different route in component correlation and weighting. Finding the ETF option best suited for your investing purposes and objectives is important.

Here's what to know about different ways to invest in the Nasdaq-100:

The QQQ

The headlining ETF when it comes to Nasdaq-100 access is the Invesco QQQ ETF. QQQ provides easy access to diverse, innovative companies with strong fundamentals that make up the Nasdaq-100, and in turn has become a go-to large-cap growth fund with proven performance. Affectionately known as “The QQQs," the fund has risen to become the second-most actively traded ETF nationally, and the eighth-largest ETF by assets under management. In fact, QQQ emphasizes the spend NDX components put toward research and development as a chief driver of growth, allowing the fund to consistently outperform benchmarks and other indexes. 

Importantly, QQQ is cap-weighted, like the NDX: The companies with the highest market capitalization enjoy greater weight in the index. This has relative upsides and downsides. Price swings for the heaviest-weighted companies — like AAPL — mean the fund will move with the trends, allowing investors to benefit greatly from the big gains these leaders achieve. On the other hand, a sharp decrease can carry outsized risk.

However, if investors want an alternative that gives roughly equal weight to components regardless of market capitalization, they can investigate the First Trust Nasdaq-100 Equal Weighted Index Fund (QQEW). QQEW, being highly correlated to QQQ, has shown the same relative strength of returns, but can provider investors extra cover in its equal-weight approach that minimizes some of the risk of volatility.

Leveraged ETFs

Leveraged ETFs like the ProShares Ultra QQQ (QLD) or the ProShares UltraPro QQQ (TQQQ) amplify index-tracking gains to garner investors even greater returns. For instance, QLD seeks to return double that of the NDX for a single day — TQQQ, triple — by using derivatives and debt to further stoke returns. For example: QQQ is up 22 percent since inception and TQQQ has returned +52 percent in its lifetime, both as of June 30, 2018. The magnified exposure can be strategic for a couple reasons. Investors buying into a leveraged, NDX-tracking ETF may do so to seek amplified returns, hedge a different position, get target exposure for less cash, or overweight a market segment for less cash.

Exposure by sector

Technology has no doubt powered much of the Nasdaq-100 growth, but it's hardly the only sector represented. Although investors get exposure to all of the Nasdaq-100 companies with a single ETF share, they can further break out sector exposure to concentrate investments. For instance, First Trust has a pair of sector-specific ETFs that allow investors to focus allocation: the Nasdaq-100 Technology Sector Fund (QTEC) and the Nasdaq-100 Ex-Technology Sector Fund (QQXT). While QTEC includes companies in software, internet services, computer hardware and semiconductors — among other verticals — QQXT selects NDX components in online retail, consumer beverages and telecommunications.

There’s no doubting the performance of technology companies in the digital age. The Nasdaq-100 has benefited from this, with roughly half its components being tech-focused. QTEC breaks out this exposure by attempting to replicate the Nasdaq-100 Technology Sector Index (NDXT), an equal-weighted index of NDX technology stocks. The NDXT, first introduced in February 2006 at a base value of 1,000, has seen considerable growth recently, adding some 2,000 points from July 2016 to July 2018 to reach more than 4,400. Dividend payments also point to sustained growth, growing from 0.20 percent in 2007 to 1.32 percent in 2016. The six-fold increase in dividend yield is all the more impressive considering the equal weighting of the NDXT.

For foreign investors

While there's ample and diverse opportunity for U.S. investors to access the Nasdaq-100, options may not be as bountiful for overseas investors. Yet Nasdaq and its partners across the world have solved that problem by making NDX-tracked ETFs available in 27 countries. By teaming with local exchanges and asset managers, Nasdaq has opened access to international investors who want to buy Google or Facebook, for example, without complicated tax and registration procedures.

Australian traders, for instance, can research the ASX-listed BetaShares Nasdaq-100 ETF (NDQ) to gain cost-effective exposure to leading U.S. companies, while also benefiting from daily liquidity and simplified tax administration.

The optionality for foreign investors goes even deeper. Changes in currency exchange rates can have negative effects, like negating equity gains. Canadian investors, however, can invest in ETFs that track a modified NDX-based index, the Nasdaq-100 Currency Hedged CAD Index (NDXCADH). NDXCADH uses the Nasdaq-100 as the underlying index, but is designed to hedge currency risk (back to the Canadian dollar in this event), allowing investors to lock in gains. The TSX-listed iShares NASDAQ 100 Index ETF CAD-Hedged (XQQ) offered by Blackrock is one such option for global investors to access large-cap stocks and benefit from mechanisms that offset negative currency exposure.

Conclusion

There is an incredible amount of diversity in the products that track the Nasdaq-100, the surface of which is barely scratched here. The variety in available ETFs gives investors the ability to take different approaches when investing to spread risk or concentrate sector exposure when investing in many of the same stocks.

ETFs tied to the Nasdaq-100 and its derivative indexes allow investors to experience the gains of the NDX in myriad ways, as well as visualize it. Gaining this perspective and insight is invaluable to making the most informed investing decisions.


For more information about the Nasdaq-100, visit our website or click here for a complete list of Nasdaq-100 exchange-traded products.

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.

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1. As of 12/31/2017
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