Innovation The Nasdaq-100: More than meets the eye

It’s likely that some investors may think of the Nasdaq-100 Index, which the Invesco QQQ ETF tracks, as a way to gain exposure to the technology sector. But in reality, there’s a lot more diversification within the 100 innovative companies in the index than you might expect.

This diversification comes in many shapes, spanning industry sectors, geographies, and even the underlying business segments of technology companies. Below, we delve into the characteristics of the Nasdaq-100 and offer up some in-depth (and likely unexpected) insights into three of the most famous companies in the world.

Sector diversification

By definition, the Nasdaq-100 includes the 100 largest non-financial companies in the Nasdaq Composite Index. It might surprise some investors to find that barely 50% of Nasdaq-100 companies are in the information technology sector, with the rest divided among communication services, consumer discretionary, health care, industrials and even a few utilities.

The 10 largest Nasdaq-100 companies comprise more than 48% of the index’s market capitalization.¹ These companies span multiple sectors, with information technology representing about 55% of the top-10 market cap and the rest allocated across communication services and consumer discretionary stocks.

While the above companies are engaged in a diverse set of businesses, they all share one aspect of their diversification strategies: investments in cutting-edge innovation that are poised to redefine how historically core industry sectors—e.g., finance, health care, manufacturing and transportation—conduct business. The table below highlights investments in research & development, products and services at the forefront of these advances.

Three takeaways for long-term investors

1. For long-term investors, diversification can be a key component of success. We believe Invesco QQQ can provide diversification on many levels based on industry composition and sources of revenues of the holdings.
2. Many Nasdaq-100 companies have made strategic investments in areas of cutting-edge innovation—wearable technologies, satellites, autonomous vehicles, streaming video games, robotics, quantum computing, and augmented & virtual reality, to name a few. Diversifying into these sectors not only broadens company revenue streams, but also migrates those revenue streams towards the next generation of traditional industry groups—like financials, healthcare, industrials and transportation. 
3. International diversification should be considered as part of a long-term investor’s strategic asset allocation, regardless of whether we see headwinds or tailwinds from the near-term macro backdrop. Investing in global companies domiciled in the U.S. can be an effective way to add international diversification, while potentially benefiting from the transparency and corporate governance standards available under U.S. regulatory guidelines. It’s no accident that the 10 largest components of the Nasdaq-100 (nearly half of the index’s market capitalization) are global leaders with significant revenues from outside the U.S.