If you are looking to invest in US equity markets through the mutual fund’s route, you will typically see that most funds benchmark their performance either against Nasdaq 100 or S&P 500 indices.
In this video, we will explain what you get if you choose to invest in funds tracking either Nasdaq 100 or S&P 500 indices and how they differ in performance and portfolio. This will help you select the fund that suits your risk and return profile.
01:28 S&P Index
05:42 NASDAQ 100 Index
08:20 Comparing the NASDAQ 100 and S&P 500
11:30 FAANG Stocks
14:06 NASDAQ 100 or S&P 500 – Which One?
👉 The S&P 500 Index
Launched in 1957, S&P 500 is one of the oldest indices of the US, made up of stocks of the 500 biggest listed US companies. These companies combined represent more than 80% of the total market capitalization of the companies listed on the US stock exchange. Therefore, S&P 500 index can be considered a broad indicator of the US equity markets.
The higher the market cap, the higher the weightage of the stock in the index. The market cap of the stocks is calculated by multiplying the number of shares available for trade on the stock exchange by the company’s stock price. Apart from market cap, there are other criteria for stocks selection such as percentage of shares available for public trading, earnings growth, trading volumes (share price multiplied by the number of shares traded), etc.
Although the top holdings include tech biggies such as Apple and Microsoft, the allocation to the sector combined is less than 30%. Companies from the top three sectors together account for around 53% of the index portfolio, which is far lower when compared to Nasdaq 100.
With around 500 stocks, the index represents over 11 sectors, including information technology, energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, communication services, real estate, and utilities.
👉 The Nasdaq 100 Index
Launched in 1985, Nasdaq 100 index represents the biggest 100 non-financial companies listed on the Nasdaq Stock Exchange.
The US is home to some of the biggest financial and technology companies. The exclusion of the financial biggies results in Nasdaq 100 being dominated by global tech majors including Apple, Google, Microsoft, Tesla, etc. Nasdaq 100 also includes the popular FAANG (Facebook, Apple, Amazon, Netflix, Google, or Alphabet) stocks of the biggest tech companies across the globe. Tech companies combined account for over half of the holdings of the index. The dominance of the technology stocks in the index makes it a narrower tech-heavy index even though it also includes Pepsi and Starbucks; however, the allocation is not very high.
S&P 500 Index V/s Nasdaq 100
Nasdaq 100 has significantly outperformed S&P 500 in terms of performance. Over the past 15 years, Nasdaq 100 has delivered a CAGR of around 16%, while S&P 500 has returned about 8%.
The average 10-year return of Nasdaq 100 over these 15 years was around 9%, while that of S&P 500 was about 5%. You could have earned a maximum 10-year CAGR return of 21% by investing in Nasdaq 100, while in the case of S&P 500, you could have earned a maximum return of 14% in the past 15 years.
The significantly higher allocation towards FAANG stocks has ensured that Nasdaq 100 has outperformed S&P 500 index by a wide margin.
👉 Nasdaq 100 or S&P 500?
The numbers show that Nasdaq 100 has significantly outperformed S&P 500 index in terms of return over long term despite witnessing higher correction. However, a tilt towards technology stocks makes Nasdaq 100 look more like a thematic index. As FAANG stocks, which account for a majority of the portfolio of Nasdaq 100, have already rallied quite a bit, they may find it difficult to sustain such as run going forward and if there is a correction in the markets, they are likely to get hit harder as seen in the past.
Therefore, the downside risk is likely to be higher in case of the Nasdaq 100 when compared S&P 500 index, which has a much broader representation of the US companies across different sectors.
So, if you are looking to own a more diversified basket of stocks, the S&P 500 will be the right fit for you. However, those who are comfortable with the slightly higher risk for the extra returns that investing in Nasdaq 100 based fund might generate will be better off with Nasdaq 100.
Choose the index based on your own risk and return profile.
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