Nasdaq-100: A gauge of the modern economy

The Nasdaq-100 Index® and S&P 500 Index® are two of the most popular equity indexes in the US. Exchange-traded funds (ETFs) designed to follow these two benchmarks are often used to anchor core portfolios. In the US, passive ETFs tracking the Nasdaq-100 have about $246 billion  in assets compared with roughly $1.1 trillion  for those tracking the S&P 500.¹  But could that gap narrow in coming years?

It’s difficult to predict but a case could be made that the Nasdaq-100, which is tracked by Invesco QQQ ETF (also known as Invesco QQQ), could be the index of the future because its constituents have a demonstrated ability to be nimble and adapt to shifting trends in the market. Whether it is Amazon starting as an online book retailer and expanding into web services through AWS, or Apple starting as a computer maker and now one of the largest cell phone manufactures in the world, many Nasdaq-100 companies have shown to diversify as consumer needs have changed.

The benchmark to beat

Is nearly 15 years of outperformance a fluke or a meaningful trend?

Let’s check the numbers. Since January 1, 2008, the Nasdaq-100 Index has delivered a cumulative total return of 750%, more than double the 315% return of the S&P 500 Index.² In turn, Invesco QQQ’s NAV has delivered a total return of 724% during the same time period. That works out to an annualized return of 14.80% for the Nasdaq-100 and 14.57% for Invesco QQQ compared with 9.60% for the S&P 500, although the Nasdaq-100 and Invesco QQQ have been slightly more volatile with a standard deviation of 19.33 and 19.31 vs. the S&P 500’s 16.22.

Click for standardized performance. Performance data quoted represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance quoted. An investor cannot invest directly in an index. Index returns do not represent Fund returns. Fund performance shown at NAV. Invesco QQQ’s total expense ratio is 0.20%

The S&P has certainly been around longer, launching in 1957 while the Nasdaq-100 was first calculated in 1985.³ Invesco QQQ, which launched in March of 1999, has tracked that Nasdaq-100 over 24 years. Performance over the past 15 years, though, favors the Nasdaq-100, which provides access to the 100 largest non-financial companies listed on the Nasdaq.

Homing in on disruption and innovation

Why has the Nasdaq-100 historically outperformed over the past 15 years? There have been several factors at work but one important reason has been the strong performance of innovative technology stocks over the past decade, particularly the tech bellwethers. For example, the technology sector in the S&P 500 has delivered a 20.65% annualized total return over the last 10 years, compared with 12.80% for the broader S&P 500.⁴ That leadership makes sense given the rapid pace of technological adoption in recent years. Per the Industry Classification Benchmark (ICB), the Nasdaq-100 has about 55% exposure to the tech sector versus roughly 32% for the S&P 500.⁵

Although the Nasdaq-100’s overweight exposure to the outperforming tech sector, when compared to the S&P 500, has been a tailwind for the past 10 years it’s important to remember that the benchmark is much more than just a technology index. The Nasdaq-100 and Invesco QQQ include companies from other sectors such as consumer products and healthcare that are transforming their respective industries to help drive growth. After all, the technology sector doesn’t have a monopoly on innovation.

Some of the most innovative companies in the world, particularly in Silicon Valley, have opted to list their stock on the Nasdaq, a trend that doesn’t seem destined to end anytime soon. The Nasdaq is associated with innovation and many cutting-edge companies. As a result, it’s not surprising that many firms want to align their brands with the innovative stamp of Nasdaq, which introduced the world’s first electronic trading platform in 1971.

An index built for the future

Although the Nasdaq-100 has a relatively shorter track record and is more concentrated in technology than the S&P 500, investors may want to ask themselves which index could better reflect where the world appears to be headed. Think: artificial intelligence (AI). You can also get a handle on a company’s commitment to innovation by their spending on research and development (R&D).

The transparent, rules-based inclusion methodology of the Nasdaq-100 may also appeal to some investors. On the other hand, the stocks in the S&P 500 are chosen by an index committee, which introduces all the potential for human error and biases. For example, Tesla – one of the most innovative companies in recent memory – didn’t join the S&P 500 until late 2020, whereas the stock was added to the Nasdaq-100 in July 2013.

Key takeaways:

• The Nasdaq-100, which is tracked by Invesco QQQ, provides exposure to a wide variety of industries, including many cutting-edge technology companies.
• The Nasdaq-100 Index has outperformed the S&P 500 in recent years partly due to the strength of cutting-edge companies innovating in their sectors.
• Artificial intelligence and other technological advances may provide a tailwind to companies committed to R&D and disrupting their industries.

Bottom line: When evaluating your core equity index, ask yourself if it looks backward to the old economy or forward to the companies poised to shape our high-tech future.