The Nasdaq Composite index is one of the most widely followed indices in the world and the best-known of all the many thousands of indices bearing the Nasdaq name.
Tending to be thought of by many investors as a “technology” index, the Nasdaq Composite is in fact home to companies from a range of sectors, though a large proportion of its constituents are indeed technology stocks.
Minnows to mega stocks
With the Nasdaq Composite including every single company listed on the Nasdaq stock exchange, its member firms include relatively unknown minnows right up to the mega stocks such as Apple, Microsoft and Amazon. In all, the Nasdaq Composite includes well over 3,000 firms.
By market cap, the Nasdaq is the second-largest stock exchange in the world, behind only the New York Stock Exchange (NYSE). A major factor that differentiates it from the NYSE is that alongside the domestic names, it also incorporates firms that are based outside the US.
What is Nasdaq index?
The Nasdaq Composite was established in 1971, at the same time as the Nasdaq stock exchange itself.
The NASDAQ acronym arose from the National Associate of Securities Dealers, which subsequently sold on the business in 2000/2001. Both the Nasdaq stock exchange and the Nasdaq indices are now owned by Nasdaq, Inc.
While the Nasdaq Composite tracks the performance of all the stocks listed on the Nasdaq stock exchange, this amounted to only 50 companies when it began. Attesting to Nasdaq´s success over the years, the index and stock exchange it mirrors have grown to include over 3,000 stocks.
In 1985, the Nasdaq-100 index came into being, representing the largest domestic and international, non-financial companies listed on the Nasdaq stock exchange.
The Nasdaq-100 incorporates firms across major industry groups such as computer hardware and software, telecommunications, biotechnology and retail/wholesale trade.
At this point, Nasdaq also established the Nasdaq Financial-100 index to represent the biggest financial services companies listed on the Nasdaq exchange.
Among the other Nasdaq indices followed by investors is the Nasdaq Biotechnology index, a benchmark incepted in 1993 to track the performance of biotechnology and pharmaceutical companies.
Low fees and requirements
Considerably lower listing fees and minimum requirements versus the NYSE have been instrumental in attracting smaller firms to list on the Nasdaq stock exchange.
The lower listing fees and requirements are especially attractive to firms in their relatively early stages of development that are keen on raising funds from US-based investors.
Smaller companies that have recently listed on the Nasdaq include UK-based biopharmaceutical firm Verona Pharma; it managed to raise $78m earlier this year through an IPO.
In tandem, the Nasdaq still retains mega stocks such as Apple, Microsoft, Amazon, Facebook and Alphabet.
In terms of sector weightings, technology firms continue to dominate the Nasdaq Composite, accounting for around 44% of the index´s market cap.
Consumer services and healthcare are the next biggest groups in the index, at approximately 21% and 13% respectively. Lower down in the pecking order are financials (8%), industrials (6%) and consumer goods (5%).
Given the Nasdaq Composite´s large proportion of technology stocks, the index was especially impacted by the dot-com bubble.
The index rose 238% in less than two years, reaching a peak of 5,049 by March 2000 versus 1,492 in 1998. By September 2002, the index had plunged 76%, when it was trading at around 1,199.
In December 2007, the Nasdaq Composite was at 2,691, still well below the peak it reached over seven years earlier. The 2008/2009 global financial crisis saw the index sink to a low of 1,293 in March 2009, a fall of 52%.
The index did not surpass its March 2000 peak until December 2015. Strong risk appetite and resurgent investor enthusiasm for technology stocks helped the index reach an all-time high of 6,305 in June 2017.
The Nasdaq is generally viewed as being more volatile than its key competitor, the NYSE. Annualised volatility over five years is 15% for the Nasdaq Composite. This compares to 9.64% for the S&P 500 index, though this latter includes large-cap stocks listed on both the Nasdaq and the NYSE.
In common with other global stock markets, volatility for the largest companies listed on the Nasdaq stock exchange is currently at a low. As volatility normally peaks at times of recession, this indicates that investors currently see little prospect of an economic slowdown.
In 2008, in the midst of the financial crisis, the CBOE Nasdaq 100 Volatility index peaked at 78.82. The same index is currently at just 14.36.
While the composition of the Nasdaq Composite reflects that of the Nasdaq stock exchange, other Nasdaq indices are typically subject to annual reranking.
Nasdaq announces the results of the annual Nasdaq-100 review in December each year. This is based on market cap using share prices as at the last trading day of October.
Companies that are still ranked within the top 100 can remain within the index. Those ranked 101-125 keep their place only if they were in the leading 100 in the prior year´s review. Firms outside the top 125 are automatically relegated.
In the most recent Nasdaq 100 annual review, the additions included business services company Cintas, toy firm Hasbro, medical diagnostics product company Hologic and semiconductor firm KLA-Tencor.
Among those removed were domestic merchandiser Bed Bath & Beyond, storage and data management company NetApp, waste management company Stericycle and supermarket chain Whole Foods Market.
Nasdaq pros and cons
The Nasdaq Composite is one of the most closely watched indices in the world, tracking the performance of the world´s second largest stock exchange.
It is not solely comprised of technology stocks, but at a sector weighting of around 44% they remain an important part of the index.
As was seen during the dot-com boom and bust, the technology sector´s significant weighting has the potential to skew the index to both the upside and downside.
Nevertheless, the index continues to attract firms across a range of industries, who are typically compelled by the Nasdaq´s lower listing costs and requirements versus the NYSE.
The Nasdaq provides both US and non-US companies with an opportunity to raise funds from a broad investor base. Today, many of the largest firms in the world are Nasdaq companies.