Two popular measures of Nasdaq-listed stocks, the Nasdaq Composite and the Nasdaq-100, are often confused. Knowing and understanding the difference between the two just got more important, especially if you’re an investor looking for exposure to the “Magnificent Seven,” the seven soaring stocks that spawned the new bull market we’re in.
So let’s start at the beginning: Nasdaq stands for National Association of Securities Dealers Automated Quotations.
Years ago, in early 1971, when so-called “listed” stocks traded exclusively at physical exchanges like the New York Stock Exchange and all orders to buy and sell a stock had to be routed through a single “specialist” trader at his post on the Exchange, whose job was to match incoming buy and sell orders and fill standing orders written in his “book,” a fledgling computer bulletin board-type system was turned into the world’s first electronic stock market by the National Association of Securities Dealers.
NASD broker-dealers called their electronic exchange Nasdaq, simply adding Automated Quotations to the Association’s acronym, because their quotes to buy and sell stocks were automated on computers and not routed to a physical exchange.
With the advent of a new type of exchange came new measures of stocks listed there. The principal index, or measure of value of stocks listed on Nasdaq is the Nasdaq Composite. The Composite, more frequently referred to in the media as simply The Nasdaq, is made up of more than 3000 Nasdaq listed stocks. And because technology companies prefer listing on Nasdaq, it’s considered a tech index.
Back in 1985, the Nasdaq-100 was launched. There are actually two Nasdaq-100s. The Nasdaq-100 consists of the 100 largest non-financial companies (based on capitalization) in the Nasdaq, and the Nasdaq Financial-100 consists of the 100 largest financial companies listed on Nasdaq.
For our purposes we’ll be talking about the Nasdaq-100, which is predominated by giant tech companies.
Both the Nasdaq Composite and Nasdaq-100 are capitalization weighted indexes. Capitalization weighting is an index construction methodology where individual components are weighted according to their relative total market capitalization. A company’s market capitalization is simply the number of common shares outstanding times the price of the stock. The higher a company’s capitalization and cap-weighting the more influence it has on any cap-weighted index it’s included in.
For example: Apple’s weighting in the Nasdaq Composite is currently about 13.79%. It has the largest weighting in the index, on any index it’s in, in fact, because Apple is currently the largest company in the world with a total market capitalization of $3.08 trillion (15.73 billion shares x $191/share; as of 8-3-23).
Currently, the seven largest companies with the greatest influence on the Nasdaq Composite because of their cap-weightings are: Apple at approximately 13.79%, Microsoft at approximately 11.44%, Amazon at 6.04%, NVIDIA at 4.72%, Tesla at 3.75%, Google/Alphabet at 6.42%, and Facebook/Meta at 2.87%. Collectively those seven stocks represent 49.03% of the Nasdaq Composite, so they move the index up and down as their prices move up and down. That’s why above I note their cap-weightings as “approximately,” because they change as the price of each stock changes.
It just so happens those seven stocks are now called the Magnificent Seven because of how high they’ve risen off last October’s lows and how they’ve skyrocketed in 2023, essentially powering the indexes they’re in, including the S&P 500, into bull market territory.
Now that you know the Nasdaq Composite consists of more than 3000 stocks and the Nasdaq-100 consists of only the 100 largest non-financial companies listed on Nasdaq, you probably figured out the Nasdaq-100, with the same seven stocks headlining that index, must have outperformed the Nasdaq Composite since last October and this year. And you’d be right.
From the beginning of 2023 through July 19, 2023, the Nasdaq Composite was up 37.18% and the Nasdaq-100 was up 44.6%. The 100 beat the Composite because the total weighting of the Magnificent Seven in the 100 is more than 55%, compared to the Composite’s 49%.
Investors mostly play the Nasdaq-100 by buying the Invesco QQQ Trust Series 1 (QQQ), also known as “the Qs,” which is an ETF that tracks the Nasdaq-100.
Here’s the twist.
Because the Nasdaq-100 has rules about capital weightings becoming too big, they rebalance the index by reapportioning the weighting of companies whose cap-weighting are more than 4.5%. They don’t do it regularly or they’d have rebalanced the index hundreds of times over the past few years.
But they just did a “Special Rebalancing.” Effective July 24, 2023, the combined cap-weighting of the Magnificent Seven in the Nasdaq-100 was knocked down to just over 43% from just over 55%.
That means the Nasdaq Composite, where the Magnificent Seven account for more than 49% of that index’s capitalization weighting, will perform better than the Nasdaq-100 if the Magnificent Seven continue to power the stock market higher.
It just so happens there’s an ETF that tracks the Nasdaq Composite, if you want to trade that as opposed to the Qs. It’s the Fidelity Nasdaq Composite Index ETF (ONEQ).
It’s up to you. If you’re looking for exposure to the Magnificent Seven, like a lot of institutional traders and money managers are, you can buy the Qs or the Composite by buying ONEQ.
I know which one I’ll buy – the latter.
— Shah Gilani
We Could Be Less Than 3 Months Out from an AI Superevent [sponsor]According to one of the world's top AI scientists, there's a major event coming as soon as three months from today that could cause expensive tech stocks like Microsoft, Google, and NVIDIA to double or triple in price in the months ahead... but whatever you do, don't go all in on big tech before you have all the details. Click here.
Source: Total Wealth