Nasdaq Composite Differ From Other Stock Market Indices
The Nasdaq is known for being a tech-heavy index. This is because the NASDAQ Stock Market is one of the first global electronic exchanges and pioneered automated trading systems. This helped to attract a large number of technology-focused companies that wanted to list on the exchange. Over the years, that tech legacy has made the Nasdaq Composite one of the most widely followed stock market indices in the United States. Along with the Dow Jones Industrial Average and S&P 500, investors look to the Nasdaq Composite as a proxy for how the overall market is performing.
The index is market capitalization weighted, meaning the company with the largest value has the greatest impact on the index’s number. The weighting also helps to ensure that all sectors are represented in the index.
This has skewed the Nasdaq Composite into being a tech-heavy index, with companies like Apple, Google and Amazon occupying a large part of its makeup. The other sectors in the index include energy, healthcare and consumer discretionary.
How Does the Nasdaq Composite Differ From Other Stock Market Indices?
Because of its heavy technology weighting, the Nasdaq Composite has been more volatile than other indexes. This has led to disproportionate losses during the dot-com bubble and the 2008 recession, but it has since recovered and become one of the more popular indexes. It is frequently cited by market commentators and referred to in mutual funds, exchange-traded funds (ETFs) and options that seek to replicate its returns.
In 2023, the Nasdaq Composite has outshone the S&P 500 and the Dow, logging returns of about 34%. This has been driven by the strong performance of technology stocks, including Facebook and Netflix.
But not all investors are comfortable with the risk of volatility and prefer to invest in an index that represents the entire market, such as the S&P 500 or Dow. These indices are also more broadly diversified, which can lead to lower volatility and better long-term returns.
The NASDAQ also has another popular index, the Nasdaq 100, which is narrower in focus and aims to track the largest 100 non-financial U.S. and international companies. It has some similarities with the Nasdaq Composite, but excludes financial stocks and has different sector composition. It is market-capitalization weighted, and its component companies must meet certain eligibility requirements to be included.
Currently, the Nasdaq 100 includes companies like Cognizant and Marriott International. The index also reviews its eligibility requirements throughout the year. If a security fails to meet these requirements, it can be removed. Investors can find many funds that track the Nasdaq 100 for low fees, such as the Fidelity Nasdaq 100 Index ETF (NDX). This fund has an expense ratio of 0.21 percent.