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You Know That Nerd From High School? He’s Changed and So Has the World’s Preeminent Large-Cap Growth Index

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You Know that Nerd from High School? He’s Changed and so Has the World’s Preeminent Large-cap Growth Index

Written by: Rob Hughes, Head of Index & Advisor Solutions, Nasdaq Global Information Services

Perceptions can be hard to change. Sometimes we think we know something based on the way it used to be, but in reality, our perceptions might be rooted in outdated facts and information. Whether you’re talking about someone you knew 30 years ago (who wants to be judged for what they did in high school?) or something that seems much less subjective like a famous index  — when you’re known for being a certain way, it can be hard to make a new impression.

In much the same way, the Nasdaq-100 — today’s leading global large-cap growth index1 — can be stuck in outdated perceptions. The Nasdaq-100 provides exposure to the 100 largest non-financial companies listed on Nasdaq , and while many still think of it as a tech-focused or even tech-exclusive index, that’s far from today’s reality.

A history rooted in tech

While the index has never been limited to tech stocks, at its inception just over three decades ago, Nasdaq’s highest growth performers were many of the tech heavyweights of the day. In 1985, Technology, as defined by the Industry Classification Benchmark (ICB), was the largest industry in the Nasdaq-100. However, the 23 technology companies only made up 23% of the market cap weight within the index. The largest stock was Wall Street’s tech darling, Intel; Apple was high on the list, although it did not yet hold the leadership position it occupies today.

The tech boom of the mid-1990s helped perpetuate the idea that the Nasdaq-100 was a “tech index.” By November 1998, with the tech-driven bull market in full force, technology stocks accounted for an unprecedented 70% of the market cap of the index. By the early 2000s, tech stocks continued to dominate the index. Tech continued its prominence into the next decade. Even as recent as 2011, when tech companies were the driving force in the recovery of the financial crisis, technology represented 61.6% of the index market cap.

What is not widely known, however, is that Consumer Services and Industrials have played a close second and third place at 21% and 15% respectively at time of inception. Some notable non-tech firms that were included at the launch were HBO, Liz Claiborne, Mack Trucks, and McCormick Spices.

Today’s view: a diversified index built on growth

Today, the Nasdaq-100 still exhibits a solid base of technology — currently accounting for 51.67% of the index market cap weight. Compared to the S&P 500, with just 17.25% of its weight attributed to technology stocks, and the Dow Jones Industrial Average, with 14.15%, the Nasdaq-100 undoubtedly has a stronger tilt towards technology stocks.  However, this tilt is not thematic in nature, but rather the result of the preeminent position of technology stocks in today’s economy and the strong growth enjoyed by the leaders in this sector, such as Apple, Microsoft, Alphabet,   Facebook, NetEase and Baidu. Moreover, the index also includes many of today’s most innovative companies in fast-growing sectors such as biotech (Gilead Sciences, Amgen, and Celgene), retail (Amazon and Starbucks), media (Comcast and Twenty-First Century Fox),  industrials (Tesla), and consumer services (Ctrip).

At 31 years old, the Nasdaq-100 is not only a collection of innovative, market-driving companies, but also a highly successful basis for tradable products. After adjusting its index weights to ensure compliance with IRS RIC diversification rules, Nasdaq launched the first ETF tied to the Nasdaq-100 index in March 1999 with a per-share asset value of about $100. Called the QQQ ETF, the fund experienced tremendous growth during its first few months of operation. Just one year later, fund assets reached $10 Billion. The Nasdaq-100’s sustained growth has earned it a reputation as a valuable hedging tool and source of exposure to tech and growth-oriented stocks.

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Though its composition has changed considerably over the years, the Nasdaq-100 continues to represent many of today’s younger, game-changing, and growth-oriented companies. Despite its long-standing reputation as a “tech index,” the Nasdaq-100 has proven itself to be so much more. Now serving as a basis for investable products in 27 countries worldwide and as the foundation for the Invesco PowerShares’ QQQ ETF, this well-rounded index is a valuable tool for growth-focused investors worldwide.

So while you may still think of that kid you knew back in high school as being an awkward nerd, he may very well now be the suave executive of a successful company. People evolve and so too has this iconic index. The Nasdaq-100’s roots in tech have helped it evolve into the index that now tracks some of the most innovative and healthy brands leading this modern economy forward.

 

To learn more about the Nadaq-100, download the whitepaper The Nasdaq-100: Tracking Innovation in Large-Cap Growth.

Read more from Nasdaq Global Indexes.

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.
© 2016. Nasdaq, Inc. All Rights Reserved.
1 On a 3-, 5-, and 10-year return basis, the NDX has outperformed all major large-cap growth funds
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