The Nasdaq Composite Index is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange. It is a broad index with a significant leaning towards the crucial technology sector, encompassing both domestic and international companies. The Nasdaq Composite Index is highly monitored, making it an essential component of financial market reports.
Key Takeaways
- The Nasdaq Composite Index comprises over 2,500 stocks that trade on the Nasdaq.
- The index is weighted based on market capitalization, including both domestic and international companies.
- It is heavily weighted in technology stocks, followed by consumer discretionary and healthcare companies.
Understanding the Nasdaq Composite Index
The Nasdaq Composite Index includes all equity securities listed on the Nasdaq, including common stocks, ordinary shares, American depositary receipts (ADRs), units of real estate investment trusts (REITs), and publicly traded partnerships, as well as tracking stocks.
Stocks that are ineligible for inclusion are securities of closed-end funds, exchange-traded funds (ETFs), preferred shares, rights, warrants, convertible debenture securities, or other derivatives.
The Nasdaq Composite Index also includes stocks of companies headquartered in the U.S. and abroad, unlike the S&P 500 Index or the Dow Jones Industrial Average (DJIA). Due to its heavy tech weighting, the index is often seen as a yardstick for the technology sector.
Methodology of the Nasdaq Composite Index
Launched on February 5, 1971, the Nasdaq Composite uses a market capitalization weighting methodology. The index value is achieved by summing up the market capitalization of its components based on their current price, adjusted by a constant index divisor. Initially set at 100 points, the index is calculated in real-time throughout the trading day.
Two versions of the index exist: a price return index and a total return index. The total return index assumes the reinvestment of cash dividends distributed by the companies within the index.
1971
The year the Nasdaq Composite Index was launched with an initial value of 100.
Changes in the share price as a result of corporate actions such as stock splits, stock dividends, or spinoffs are reflected on the event’s ex-date. Changes in total shares outstanding due to conversions, stock repurchases, secondary offerings, or acquisitions are usually updated the night before the action’s effective date.
Eligibility for the Index is reviewed throughout the year, allowing removal of any security not meeting the criteria, typically at the last sale price.
Composition of the Nasdaq Composite Index
As outlined, the Nasdaq Composite is composed of over 2,500 different companies trading on the Nasdaq. Here’s a sector breakdown as of July 10, 2023:
| 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% |
The 10 most heavily weighted securities in the Nasdaq Composite Index as of March 31, 2023, 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%
Market Performance of the Nasdaq Composite Index
The Nasdaq Composite Index had an annualized return of 14.66% over the 10 years ending July 7, 2023.
Its substantial decline of 9.1% in Q1 2022 was its worst since a 14.2% loss in Q1 2020 during the COVID-19 pandemic. The 12% drop in April 2022 was the most significant loss since a 17.4% decline in October 2008 amid the global financial crisis.
The Nasdaq Composite met the common definition for a bear market in mid-March 2022 by dropping more than 20% from its January 3, 2022 peak, saw a relief rally, but gave back those gains over the next month.
Being heavily focused on the volatile tech sector, the index’s performance tends to be more erratic compared to the S&P 500 or the Dow Industrials.
Investing in the Nasdaq Composite Index
While you can’t directly invest in the Nasdaq Composite Index, you can invest in securities that mimic its performance. Assets like mutual funds or exchange-traded funds (ETFs) composed of the same stocks with identical weightings aim to match its performance.
Advantages of Index Investing
There are significant benefits to index investing. They provide broad market exposure as they comprise stocks from various sectors. The Nasdaq, for instance, is tech-heavy but includes consumer discretionary, healthcare, and financial stocks, among others.
Index investing is easier to manage, as securities like mutual funds and ETFs are reallocated whenever the corresponding index changes, removing any portfolio manager bias as changes are only made when the index adjustments occur.
Constructing the Nasdaq Composite Index
The Nasdaq Composite Index uses a market-capitalization-weighted approach, thus giving heavier weight to larger companies. It’s one of the most closely watched indexes worldwide.
The Bottom Line
The Nasdaq Composite Index gained prominence thanks to the spectacular growth of highly successful companies with Nasdaq-listed stocks, including Microsoft, and more recently, Apple and Alphabet. However, its success also means the index is heavily top-weighted. The top five companies (six stocks if counting both traded classes of Alphabet’s shares) constitute over 40% of the index weight.
Moreover, the high-growth stocks dominating the index are typically more sensitive to economic changes and more volatile. When markets perform well, the Nasdaq Composite often stands out with gains like its 43.6% surge in 2020, following a 35.2% rise in 2019. Conversely, rough times bring notable losses, such as a 40.5% drop in 2008 or significant downturns during the early months of 2022.
Related Terms: S&P 500 Index, Dow Jones Industrial Average, market capitalization, index funds.
References
- Nasdaq. “Nasdaq Composite Fact Sheet”.
- Nasdaq. “NASDAQ Composite - Industry Breakdown”.
- Nasdaq. “NASDAQ Composite”, Page 1.
- Nasdaq. “Nasdaq Index Policies & Procedures: Calculation Manual – Equities & Commodities”.
- FRED, Federal Reserve Bank of St. Louis. “Nasdaq Composite Index”.
- Nasdaq. “Nasdaq Composite Index Methodology”, Page 5.
- Nasdaq. “Nasdaq Total Returns”.
- Nasdaq. “Corporate Actions and Events Manual—Equities”.
- Nasdaq. “NASDAQ Composite - Overview”.
- Morningstar. “Nasdaq Composite PR USD: Performance”.
