What Is the Nasdaq Composite Index?
The Nasdaq Composite Index tracks over 2,500 stocks listed on the Nasdaq stock exchange, using a market capitalization-weighted methodology. Known for its heavy weighting in the technology sector, this index includes both domestic and international companies, making it a focal point for investors and analysts alike. As a key barometer of the tech-heavy Nasdaq exchange, it provides insights into market trends and economic shifts.
Key Takeaways
- The Nasdaq Composite Index is a market capitalization-weighted index encompassing over 2,500 stocks, with a strong focus on the technology sector.
- It tracks both domestic and international companies but excludes closed-end funds, ETFs, and certain other securities.
- Launched in 1971 with a base value of 100, its performance is viewed as an indicator of the tech market’s health and volatility.
- While direct investment in the index is not possible, mutual funds and ETFs can mimic its performance through similar stock compositions and weightings.
- The index’s heavy tech focus leads to greater volatility compared to indexes like the S&P 500 or the Dow Jones Industrial Average.
Key Stocks and Sectors in the Nasdaq Composite Index
The Nasdaq Composite Index includes all equity securities listed on the Nasdaq, such as common stocks, ADRs, REITs, and publicly traded partnerships.
Ineligible stocks include those of closed-end funds, ETFs, preferred shares, warrants, convertible debentures, or other derivatives.
The Nasdaq Composite contains U.S.-headquartered and international stocks, differing from the S&P 500 Index and the Dow Jones Industrial Average (DJIA).
Important
The Nasdaq Composite Index is one of the most widely-watched indexes in the world and is often seen as a stand-in for the technology sector, due to its heavy weighting in tech companies.
Understanding the Calculation of the Nasdaq Composite Index
Launched on Feb. 5, 1971, with a value of 100, the Nasdaq Composite is calculated by summing component market capitalizations, adjusted with an index divisor.
Calculated throughout the trading day, the index’s value updates every second from 9:30 a.m. to 5:16 p.m. ET, with adjustments possible until 5:15 p.m.
Two versions of the Nasdaq Composite Index are calculated. The first is a price return index, and the other is a total return index. The total return index assumes the reinvestment of cash dividends distributed by companies included in the index.
1971
The year the Nasdaq Composite Index was launched. It had an initial value of 100.
Corporate actions affecting share prices, like splits or spinoffs, are handled on the ex-date. Changes from conversions or acquisitions are recorded the prior night.
Eligibility requirements for the index are reviewed throughout the year. A security that does not meet the eligibility requirements can be removed at any time, usually at its last sale price.
Sector Influence and Stock Weighting in the Nasdaq Composite
As noted above, the Nasaq Composite is made up of more than 2,500 different companies that trade on the Nasdaq. As of July 10, 2023, the Nasdaq Composite Index’s industry weights were:
| Sector Breakdown for Nasdaq Composite Index | |
|---|---|
| Technology | 55.32% |
| Consumer Discretionary | 18.80% |
| Healthcare | 8.08% |
| Industrials | 4.66% |
| Financials | 3.47% |
| Telecommunications | 3.22% |
| Consumer Staples | 2.96% |
| Energy | 1.05% |
| Real Estate | 1.05% |
| Utilities | 0.94% |
| Basic Materials | 0.45% |
As of March 31, 2023, the Nasdaq Composite’s top 10 securities by weight were:
- Apple (AAPL): 13.79%
- Microsoft (MSFT): 11.44%
- Amazon (AMZN): 6.04%
- NVIDIA (NVDA): 4.72%
- Tesla Inc (TSLA): 3.75%
- Alphabet Class A (GOOGL): 3.21%
- Alphabet Class C (GOOG): 3.21%
- Meta Platforms (META): 2.87%
- Broadcom (AVGO): 1.63%
- Pepsico (PEP): 1.15%
Analyzing Returns and Volatility of the Nasdaq Composite
The Nasdaq Composite Index produced an annualized return of 14.66% over the 10 years through July 7, 2023.
The 9.1% drop in Q1 2022 was the worst since a 14.2% loss during Q1 2020’s COVID-19 onset. The Nasdaq’s 12% drop in April 2022 was its worst since the 17.4% decline in October 2008 at the height of the global financial crisis.
The Nasdaq Composite met the common definition for a bear market in mid-March of 2022 by dropping more than 20% from its Jan. 3, 2022 peak. The index rallied in early April, halving its losses, but lost those gains the following month.
Because the Nasdaq Composite is dominated by the historically volatile technology sector, index performance tends to be more volatile than that of the S&P 500 or the Dow Industrials.
How Can I Invest in the Nasdaq Composite Index?
No, you can’t invest in the Nasdaq Composite Index. But you can invest in a security that mimics its performance. There are assets like mutual funds or exchange-traded funds (ETFs) that are composed of the same stocks with the same weightings that try to at least match the index’s performance.
What Are the Benefits of Index Investing?
There are several key benefits of index investing. They give you broad exposure to the market. That’s because they are made up of stocks from a wide range of different sectors. For instance, the Nasdaq is heavily focused on technology stocks but also has exposure to consumer discretionary, healthcare, and financial stocks among others.
Index investing is easier to manage because securities like mutual funds and ETFs are reallocated whenever the corresponding index changes. This eliminates any bias as portfolio managers only make adjustments when the index does.
How Is the Nasdaq Composite Index Constructed?
The Nasdaq Composite Index is a market-capitalization-weighted index. This means the index is heavily influenced by larger companies. The index is one of the most heavily-watched in the world.
The Bottom Line
The Nasdaq Composite Index serves as a critical indicator of the tech sector’s health, reflecting the performance of over 2,500 Nasdaq-listed stocks. Its heavy concentration in the technology sector, including major companies like Apple, Microsoft, and Alphabet, can lead to significant volatility.
Investors can’t directly invest in the index, but they can mimic its performance through mutual funds and ETFs. This approach allows for broader market exposure while managing the index’s inherent volatility.
While the Nasdaq Composite has a history of strong gains, as seen in its 2019 and 2020 performances, it also can experience significant downturns, as demonstrated by the steep declines in 2008 and early 2022. Understanding the index’s top-heavy nature and economic sensitivity is crucial for investors seeking informed decisions.