Why Nasdaq Index Funds Are Worth Your Investment

Index funds are a great investment for building wealth over the long term, which is why they're so popular with retirement investors. They are a group of stocks that mirror the performance of an existing stock market index, such as the Standard & Poor's 500 index. An index fund will be made up of the same investments that make up the index it tracks, so the performance of the index fund usually closely mirrors that of the index, without the need for hands-on management.

Index funds are a low-cost, easy way to build wealth. They are either a mutual fund or an exchange-traded fund (ETF) that holds a portfolio of securities that track the performance of a market index. They are perfect for beginner investors and are used extensively as core holdings in retirement accounts. They also offer exposure to either the broad market or to a specific market sector, depending on your interest.

The NASDAQ-100 is one of the world's preeminent large-cap growth indexes. It includes 100 of the largest domestic and international non-financial companies listed on the NASDAQ Stock Market based on market capitalization. It is home to the four companies that have touched the trillion-dollar mark in the US: Apple, Amazon, Microsoft, and Alphabet.

If you want to invest in the NASDAQ index, you have two main options: mutual funds and ETFs. With a mutual fund, a company pools your money with cash from other investors to buy securities like stocks and bonds. As an investor, you buy shares in the fund, which is professionally managed and has relatively low investment minimums. Mutual funds usually invest in hundreds or even thousands of securities at once, so you can diversify your investments. ETFs, on the other hand, are traded on a national stock exchange and at market prices that may or may not be at the net asset value of the shares.

What is the Nasdaq Index?

The Nasdaq Composite Index is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange. It is heavily weighted towards the technology sector, but also includes consumer discretionary and healthcare companies. The index is composed of both domestic and international companies and is one of the most widely watched indices in the world. It is often seen as a stand-in for the technology sector due to its heavy weighting in tech companies.

The Nasdaq Stock Market is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume and is ranked second on the list of stock exchanges by market capitalization of shares traded, behind the New York Stock Exchange. The exchange platform is owned by Nasdaq, Inc., which also owns the Nasdaq Nordic stock market network and several US-based stock and options exchanges. The Nasdaq exchange was founded in 1971 by the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority, and began operations as the world's first electronic stock market.

The Nasdaq-100 Index (NDX) is one of the world's preeminent large-cap growth indexes. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. It is home to the four US companies that have touched the trillion-dollar mark: Apple, Amazon, Microsoft, and Alphabet. While technology is a dominant segment in the index, it is well-balanced by sectors such as consumer services, healthcare, consumer goods, and industrials, which constitute the other 50%.

What are the benefits of investing in the Nasdaq Index?

Investing in the Nasdaq Index can be a great way to build wealth over the long term. Here are some of the benefits of investing in the Nasdaq Index:

Diversification

The Nasdaq-100 Index is a large-cap growth index that includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market. While the index has a strong focus on technology companies, it is well-balanced by sectors such as consumer services, healthcare, consumer goods, and industrials, which constitute the other 50% of the index. This diversification helps to reduce risk and provide exposure to a range of strong companies across various sectors.

Strong Track Record of Performance

The Nasdaq-100 Index has a proven history of high index performance. According to Morningstar, the Nasdaq index had an average annual return of 16.03% over the past 10 years. Since 2008, the Nasdaq-100 has generated higher growth rates than competing indexes, such as the S&P 500 Index and the Russell 1000 Growth Index.

Access to Top Innovative Companies

The Nasdaq-100 Index includes some of the largest and most innovative companies in the world, such as Apple, Amazon, Microsoft, and Alphabet. These companies are known for their focus on innovation and future growth, making the Nasdaq-100 Index an attractive option for investors looking to invest in leading companies that are driving the economy.

Low Costs and Tax Efficiency

Index funds, in general, tend to have lower costs compared to actively managed funds. The Nasdaq-100 Index is often accessible through exchange-traded funds (ETFs) and mutual funds, which have relatively low expense ratios. For example, the Invesco QQQ Trust ETF (QQQ), a popular ETF that tracks the Nasdaq-100 Index, has an expense ratio of 0.20%. Additionally, index funds tend to have lower portfolio turnover, resulting in lower taxes for investors.

Accessibility and Flexibility

Investing in the Nasdaq-100 Index is accessible to investors at all levels, with various investment options available. In addition to ETFs and mutual funds, investors can also consider options, futures, and annuities to gain exposure to the index. The index is also accessible to investors from multiple countries through different financial products.

How do I invest in the Nasdaq Index?

There are multiple ways to invest in the Nasdaq-100®, which is the best way to invest in some of the top non-financial companies listed on the Nasdaq. Here are the most common methods:

• Exchange-traded funds (ETFs): ETFs are a popular and effective way to invest in the Nasdaq. They are 'passive' investments that use computer algorithms to replicate a particular index. ETFs are traded on a national stock exchange and can be easily traded like stocks. The Invesco EQQQ Nasdaq 100 UCITS ETF is an example of an ETF that replicates the Nasdaq 100 Index.
• Mutual funds: Mutual funds are an effective way to gain exposure to the Nasdaq-100® for investors at all levels. They are designed to provide diversified exposure and long-term growth, while protecting your income and assets. A popular option is the Fidelity NASDAQ Composite Index Fund (FNCMX), which seeks to provide results that closely correspond to the performance of the NASDAQ Composite Index.
• Options: Options are contracts that provide investors with the option to buy or sell a security at a specific date and price. They are considered riskier and are better suited for more sophisticated investors.
• Futures: Futures are also riskier derivatives that are best suited for more sophisticated investors. They are contracts that provide a way to invest in commodities markets and are often used for hedging or speculation. They have higher liquidity than options.
• Annuities: Annuities that track the Nasdaq-100® are worth considering for long-term retirement vehicles or life insurance. They provide guaranteed income after retirement and can be funded with a lump sum or through regular payments.

Other ETFs that track the Nasdaq-100® include:

• IShares Nasdaq-100 UCITS ETF (Germany)
• BMO Nasdaq-100 Equity Hedged to CAD Index
• Amundi ETF Nasdaq-100 (France, Multiple Europe)
• MOSt Shares Nasdaq-100 (India)
• Guotai Nasdaq-100 ETF (China)
• BetaShares Nasdaq-100 ETF (Australia)
• Fubon Nasdaq-100 ETF (Taiwan)
• NASDAQ-100 European Tracker ETF (Multiple Europe)
• IShares NASDAQ 100 Index ETF (Hong Kong)
• TIGER NASDAQ-100 ETF (South Korea)
• GF NASDAQ-100 ETF (China)
• BMO NASDAQ 100 (Hong Kong)
• IShares Nasdaq-100 Index-HK (Hong Kong)
• Horizons NASDAQ-100 Index ETF (Canada)

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What are the risks of investing in the Nasdaq Index?

Investing in the Nasdaq Index is not without its risks. Here are some of the key risks to consider before investing:

Risk of Concentration in a Few Large Companies

The performance of the Nasdaq-100 Index is heavily influenced by a small group of large companies, often referred to as the "Magnificent Seven." These companies, including Apple, Amazon, Microsoft, and Alphabet, can have an outsized impact on the index's performance. For example, as of October 2023, these seven companies made up about 28% of the S&P 500, with Apple alone having a market cap nearly 6 times that of the 10th largest company. This concentration can lead to higher volatility and increased risk if one or more of these companies experience a downturn.

Sector-Specific Risks

The Nasdaq-100 Index has a significant focus on technology and growth companies, which can make it more vulnerable to sector-specific risks. For instance, the index may be more sensitive to changes in the technology industry, such as regulatory shifts or market disruptions, which could disproportionately affect the performance of the index.

Underperformance Risk

While the Nasdaq-100 Index has historically generated higher growth rates than competing indexes like the S&P 500, there is no guarantee that this trend will continue. The index could underperform other indexes or the overall stock market in certain periods, leading to lower returns for investors.

Market Risk and Volatility

Like any stock market investment, investing in the Nasdaq-100 Index carries market risk. The value of the index can fluctuate due to various economic, political, or market factors. During bear markets or periods of high volatility, the index may experience significant declines, potentially resulting in losses for investors.

Liquidity Risk

Some investment options for the Nasdaq-100 Index, such as annuities or certain types of ETFs, may have lower liquidity compared to other investments. This means that it could be more difficult or time-consuming to convert these investments into cash without incurring losses.

It is important to carefully consider these risks and conduct thorough research before deciding to invest in the Nasdaq-100 Index. Diversification, long-term investment horizons, and a careful assessment of your risk tolerance are crucial factors to keep in mind when making investment decisions.

What are the alternatives to investing in the Nasdaq Index?

There are several alternatives to investing in the Nasdaq Index. Here are some options:

Exchange-Traded Funds (ETFs)

ETFs are a popular alternative to investing directly in the Nasdaq Index. ETFs are baskets of stocks that track a particular index, such as the Nasdaq-100. They offer the benefits of a diversified portfolio and can be easily traded on stock exchanges. Examples of ETFs that track the Nasdaq-100 include:

• Invesco QQQ Trust ETF (QQQ)
• First Trust Nasdaq-100 Equal Weighted Index Fund (QQEW)
• Invesco NASDAQ 100 ETF (QQQM)
• Victory Nasdaq-100 Index Fund (USNQX)
• Invesco ESG Nasdaq 100 ETF (QQMG)
• Invesco Nasdaq Next Gen 100 ETF (QQQJ)
• Invesco ESG NASDAQ Next Gen 100 ETF (QQJG)
• Invesco NASDAQ Future Gen 200 ETF (QQQS)

Mutual Funds

Mutual funds are another option for investors seeking exposure to the Nasdaq-100. Mutual funds are investment funds that pool money from multiple investors to purchase a diversified range of assets, such as stocks, bonds, or other securities. They are typically managed by investment professionals and offer a simpler way to invest compared to purchasing individual stocks. Examples of mutual funds that track the Nasdaq-100 include:

• Shelton NASDAQ-100 Index Direct (NASDX)
• Invesco Nasdaq 100 Index Fund (IVNQX)

Other Index Funds

In addition to the Nasdaq-100, there are other broad-market indexes that investors can consider, such as the S&P 500 or the Dow Jones Industrial Average. Index funds that track these indexes can provide exposure to a diverse range of companies and sectors. Examples of S&P 500 index funds include:

• Vanguard S&P 500 ETF (VOO)
• SPDR S&P 500 ETF Trust (SPY)
• IShares Core S&P 500 ETF (IVV)
• Schwab S&P 500 Index Fund (SWPPX)

Options, Futures, and Annuities

Investors can also consider options, futures, and annuities as alternatives to investing directly in the Nasdaq-100. These are more complex financial instruments that can provide exposure to the performance of the index while offering different risk and return profiles. Options and futures can be riskier and are typically suited for more sophisticated investors, while annuities can provide guaranteed income after retirement but with lower growth potential.

Frequently asked questions