APRIL 02, 2014
THE NASDAQ COMPOSITE INDEX
A FOURTEEN-YEAR RETROSPECTIVE
DAVID KREIN | Head of Research • NASDAQ OMX Global Indexes
JEFFREY W. SMITH | Managing Director • NASDAQ OMX Economic Research
HIGHLIGHTS
„„ The NASDAQ Composite continues to be a usefully distinct stock market metric that distinguishes itself from other broad indexes routinely
covered in the financial media.
„„ Although the NASDAQ Composite has crossed 4000 again, a level last achieved in 1999, the index composition and valuation have experienced
dramatic changes during this 14-year period. The changes reflect trends that are NASDAQ-specific, but also reflect the macro forces impacting
the broader economy and capital markets.
„„ The current index has about half the components it did 14 years ago (4,715 in 1999 versus 2,472 at the end of 2013). The current components,
though, are on average about twice the size as they were in 1999.
„„ The majority of the securities (by index weight) that left the index since the end of 1999 did so as a result of merger and acquisition activity.
„„ The current index is still strongly oriented towards the information technology sector, as it has always been. Currently 46% of the index by
weight is classified as Info Tech. The extent of technology orientation, however, appears to be receding.
„„ Company valuations at the current index level are much more conservative than during the midst of the tech bubble of 1999/2000.
„„ About 20% of current index weight (710 stocks) is from IPOs that NASDAQ brought to market during the last 14 years.
INTRODUCTION
At the end of November 2013, the NASDAQ Composite Index reached
the milestone level of 4000 for the second time. The first time the
index crossed this level was during the final days of 1999. At that time,
what in retrospect became known as the “Tech” or “Dot-com” bubble
was well underway. By early March 2000 the Composite would go on to
reach its all-time peak of 5049, after which it began a precipitous fall
as the bubble burst. The following figure illustrates this bubble and
the steady climb back to 4000:
NASDAQ COMPOSITE INDEX: 1990–2013
6000
5000
4000
3000
2000
1000
JAN. 14
JAN. 10
JAN. 06
JAN. 04
JAN. 02
JAN. 98
JAN. 94
JAN. 90
0
Well before the tech bubble, but certainly during it, the NASDAQ
Composite gained a remarkable level of publicity. Then, as now,
the daily performance of the Composite is routinely reported by the
mainstream and financial press, along with that of the Dow-Jones
Industrial Average (DJIA) and the S&P 500. The term “tech-heavy” is
often used by reporters when mentioning “the NASDAQ.”
Before reviewing the changes that have occurred over the last 14
years, it is useful to understand the details behind the construction
of the NASDAQ Composite. The index simply represents the value of all
stocks listed on The NASDAQ Stock Market. Included are all common
stocks and common equivalents, such as American Depository
Receipts (ADRs) and Ordinary Shares (both of which refer to shares
of non-US issuers). Derivatives such as warrants, as well as funds
such as Exchange-Traded Funds (ETFs) are excluded. This purely
transparent and automated approach stands in stark contrast with
the Dow-Jones Industrial Average and the S&P 500, the components
of which are chosen by committee.
The NASDAQ Composite has been around since the launch of NASDAQ
on February 5, 1971, when its value was set at 100. The index is market
capitalization weighted, meaning that a given stock’s weight in the
index is proportional to its market cap. A stock’s weight is not “float-
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adjusted,” i.e., reduced to account for shares not available to trade by
the investment community. (Specific index rules are in a methodology
document available at indexes.NASDAQOMX.com/docs/methodology_
COMP.pdf.)
The NASDAQ Composite should not be confused with another wellknown NASDAQ index, the NASDAQ-100. The latter is made up of the
top 100 non-financial companies listed on NASDAQ. It began in 1985,
and uses an adjusted market cap weighting method that ensures
that no single component of the index carries too much weight. It is
interesting to note that while the Composite receives the majority of
the coverage in the financial press, the NASDAQ-100 is much more
prominent in terms of having financial products tied to it. Indeed, the
NASDAQ-100 is specifically designed and maintained to provide the
basis for financial products. For example, one of the largest ETFs in
the world, the PowerShares QQQ, is benchmarked to the NASDAQ-100.
The NASDAQ-100 also has a wide array of futures, options, and
other products tied to it. As with the Composite, the NASDAQ-100’s
components are not chosen by committee, but by a set of distinct
eligibility criteria and rules-based methodology.
The striking conclusion of the table is that the current index has 48%
fewer components as before, but these components are nearly 120%
larger than before on average. Also worth noting, while the value of
the index at the two points of comparison are about equal, the market
capitalization is 15% higher. This change is due to increases in shares
of the listed companies, not increases in prices.
The results of Table 1 reflect a national trend that extends beyond
NASDAQ—a shrinking number of listed public companies. The following
graph shows the number of common stocks listed on the three US
listing venues: NASDAQ, NYSE, and NYSE MKT (formerly the American
Stock Exchange). The graph illustrates a remarkably steady decline;
the end result being that the number of listings is about half of what
it was at the start of the 2000s. The causes of this trend and whether
capital markets are better or worse off as a result is a fascinating
question beyond the scope of this paper.
NUMBER OF LISTED U.S. COMMON STOCKS
LISTING VENUES: NASDAQ, NYSE, NYSE MKT
In fact, there are so many changes that have occurred in this 14year period that analyses from several perspectives are warranted
and worthwhile.
2014
2012
2010
2008
2006
4000
Table 2 shows the identity and market capitalizations of the top
ten components.
TABLE 2: TOP 10 COMPONENTS THEN AND NOW
12/31/99
12/31/13
MKT CAP
($BLNS)
STOCK
MKT CAP
($BLNS)
MICROSOFT
$606
APPLE
$505
CISCO
$360
MICROSOFT
$312
QUALCOMM
$332
GOOGLE
$310
INTEL
$277
AMAZON
$182
WORLDCOM
$228
INTEL
$129
RATIO
ORACLE
$151
QUALCOMM
$125
$132
CISCO
$120
Table 1 shows the total number of index components at the end of
1999 and the end of 2013. Also shown are the total market cap of the
components and the average market cap per component.
TABLE 1: COMPONENTS OF COMPOSITE INDEX
DEC 31,
2013
5000
STOCK
COMPONENT COMPOSITIONS
DEC 31,
1999
6000
2004
However, over longer time periods such as the last 14 years, the
component stocks do change in very significant ways. This means
observers cannot easily interpret the significance of NASDAQ 4000
then versus NASDAQ 4000 now.
7000
2002
From day-to-day, changes in the level of the NASDAQ Composite (or no
change at all) are reflective of the changes in value of the component
stocks. Observers can easily interpret the NASDAQ at 4000, then 4001,
then 4010, and so on. This is because the components, over such
short time periods, don’t change very much, except for their prices.
8000
2000
THE CHANGING NATURE OF THE COMPOSITE INDEX
NUMBER OF STOCKS AT MID-YEAR
9000
VALUE OF INDEX
4069
4177
1.03
DELL
NUMBER OF COMPONENTS
4,715
2,472
0.52
SUN MICROSYSTEMS
$117
GILEAD SCIENCES
$115
TOTAL MARKET CAP ($B)
$5,453
$6,271
1.15
YAHOO
$103
COMCAST
$111
AVG MARKET CAP ($MM)
$1,157
$2,537
2.19
JDS UNIPHASE
$75
FACEBOOK
$102
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The top four companies of 1999 still appear in 2013, but their
aggregate market value is 44% of what it was then. The fifth company,
WorldCom, went bankrupt in 2002. The combined reduction in market
cap of these five securities is about $1.1 trillion, which is nearly 20%
of NASDAQ’s total market cap in 1999. In fact, exclusive of these five
stocks, the average market cap per stock rose from $774 million to
$2.26 billion, an increase of 192%.
The table shows why the index is strongly associated with the
technology sector, both in 1999 and currently. It is interesting to
see, however, in the current top 10 list the emergence of marquee
companies not in the Information Technology sector: Amazon in
retailing, Gilead in biotech, and Comcast in media. Also noteworthy is
the presence of the largest social networking company, Facebook.
Overall, while some names have changed, there can be no doubt
that the NASDAQ Composite index’s top components have historically
featured companies that are known for innovation and growth.
NATURE OF DELETIONS
As the preceding tables illustrate, there has been substantial change
in the composition of the index as well as a reduction of about onehalf in the number of components from 2000. What has happened to
the companies present in 1999 but no longer in the index?
TABLE 3: DISPOSITION OF INDEX COMPONENTS PRESENT AT END OF 1999
NUMBER
TOTAL MKT CAP AT
END OF 1999 ($T)
ALL
4,715
$5.43
VETERANS TO END OF 2013
1023 (22%)
$2.89 (53%)
DELETED BY END OF 2013
3692 (78%)
$2.57 (47%)
About 53% of the market value of the index, drawn from 1,023 issues,
has lasted 14 years to continue to be in the index. The other half of
market value, made up of almost 3,700 issues, representing 78%
of the stocks on NASDAQ at the time, have left the index. Given the
numbers, it is clear that the deletions tended to be smaller on average
than the veterans ($696 million versus $2.82 billion).
NASDAQ tracks the cause behind these deletions, summarized as follows:
TABLE 4: REASON FOR NASDAQ DELETIONS
NO. STOCKS PCT MKT CAP
MERGER/ACQUISITION
1786
53.9%
REGULATORY NON-COMPLIANCE
674
17.4%
VOLUNTARY DELISTING
812
25.0%
MOVED TO OTC
109
1.3%
OTHER
311
2.4%
TOTAL
3692
100.0%
Most interesting to note is that 54% of the stocks by market cap
(and 46% by number of deleted stocks) were removed due to merger
and acquisition activity. This runs counter to the popular belief that
in the collapse of the tech bubble most of the NASDAQ stocks were
“dot-coms” and deleted due to bankruptcy. This is, in fact, not the
case at all.
This M&A activity is consistent with a general theme of a market of
fewer but larger public companies. Within the M&A category there are
several possible outcomes:
a. Both acquirer and target are listed on NASDAQ and the combined
entity remains listed on NASDAQ. This would reduce the number of
NASDAQ-listed companies, but would not result in a reduction in the
market cap of listings. (Presumably the market cap of the combined
entity is roughly the sum of the two companies individually.)
b. E
ither the acquirer or target is listed on NASDAQ, and the combined
entity leaves NASDAQ. This would reduce the number of NASDAQlisted companies and would reduce the market cap of listings.
More than 17% of deletions (in terms of value) was a result of
companies failing to meet listing standards as a result of declining
business prospects, including bankruptcy. The largest company in
this category was telecommunications firm WorldCom. This company’s
demise, along with that of NYSE-listed Enron, was a key trigger behind
the Sarbanes-Oxley reforms of 2002 mandating tighter financial
management and reporting for public companies. The failure of many
of the dot-coms was a trigger for another regulatory reform—the
Global Securities Analyst Settlement of 2003. This settlement sought
to ensure that research from securities analysts was not conflicted by
investment banking relationships.
A comparatively small amount of lost market cap was due to
companies delisting for reasons other than being forced to
delist. An example of this case concerns ADR programs that were
cancelled by the (foreign) issuer. Another small group of companies
left NASDAQ but continued to trade on the Over-the-Counter (OTC)
market. While not representing an outright cessation of trading, this
demotion to OTC trading was typically the result of an inability to
meet listing standards.
ADDITIONS TO INDEX
As a flip side to the deletions, analysis of additions to the NASDAQ
Composite index can also be considered. The following table provides
this information.
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TABLE 5: SOURCES OF NASDAQ COMPONENTS SINCE 1999 AS OF END
OF 2013
CHANGING PROFILE
NUMBER
PCT OF MKT CAP
END OF 2013
VETERANS
1023
61.2%
IPOS
710
19.8%
COMPANY AGE
SWITCHES FROM OTHER EXCHANGES
147
10.8%
UPGRADES FROM OTC
298
1.7%
OTHER
294
6.5%
TOTAL
2472
100.0%
NASDAQ has always been thought of as the home of younger
companies. In fact, it also contains a number of companies dating
to the 19th century, many of which are community banks (among
the oldest is Hingham Institution for Savings, founded in 1834). On a
market-cap weighted basis, however, NASDAQ tends to be a market of
younger, growth-oriented companies. Consider the “median marketcap weighted age,” defined such that half the index market cap is
made up of companies older, and half younger, than this median
age. For this analysis, age is defined as time from incorporation,
not the time from IPO or initial listing. For, example, Facebook was
incorporated in 2004 but did not have its IPO until 2012. As of the end
of 2013, therefore, its age was nine years.
The majority of the current value of the Composite is from companies
that were in the index in 1999. These 1,023 veterans, which are 61%
of the current index value and 41% by number of stocks, have an
average size of $3.8 billion, while in 1999 their average value was
$2.8 billion.
It is interesting to note how these figures look without the top four
of 1999: Microsoft, Intel, Cisco, and Qualcomm. In 1999, the 1,019
surviving stocks had a market cap of $1.3 trillion; those same 1,019
veterans had a market cap of $3.2 trillion at the end of 2013, an
increase of 140% (versus 33% when the top four are included).
The largest source of additions has been IPOs. Over the last 14 years
NASDAQ has brought to market 710 stocks that are still listed on
NASDAQ today. Perhaps the most prominent among them are Google
and Facebook, but there are many other easily recognizable names.
Transfers from the NYSE and NYSE MKT totaled 147 and account for
about 11% of market value. Most of these transfers have occurred
from 2008 forward. Some of the larger switches from NYSE are
Twenty-First Century Fox (formerly News Corp), Texas Instruments,
and Automatic Data Processing (ADP). Note the large average size
of these transfers. The size and number of switchers illustrate
a competitive dimension to listings, with moves going in both
directions.
A comparatively small group of additions have joined the NASDAQ
Composite by upgrading from the OTC world. Finally, some companies
have joined by other means, typically through some type of
corporate action such as a spinoff. A recent example is the listing of
Kraft Foods, which was spun off of Mondelez (itself originally known
as Kraft). Another example is the parent company of NASDAQ itself,
the NASDAQ OMX Group, which was carved out of the old National
Association of Securities Dealers (NASD), a regulatory body, and
never came to market as an IPO.
The large number of changes in component stocks over time has
begun to shift the profile of the Composite in meaningful ways.
TABLE 6: MARKET CAP MEDIAN AGE OF NASDAQ COMPANIES
DEC 31, 1999
DEC 31, 2013
15.1 YEARS
25.0 YEARS
All else equal, a mature steady-state capital market would be
expected to have a natural cycle of company births and deaths
leading to a constant median age. On NASDAQ, however, in 14 years,
the median age went up 10 years, indicating substantial maturation.
The age of veterans and new additions as of the end of 2013 is shown
in the next table.
TABLE 7: MARKET CAP MEDIAN AGE OF COMPOSITE COMPONENTS AS OF
END OF 2013
MEDIAN AGE (YEARS)
VETERANS
36.9
IPOS
13.9
SWITCHERS (EXCHANGE + OTC)
16.9
OTHER
14.2
Not surprisingly, the veterans are the oldest group, their age being
exactly 14 years older than it was in 1999. Even at 37 years, however,
the veterans are still young companies. Also not surprising is the low
median age of the IPOs. The switchers are perhaps surprisingly young.
This finding suggests that younger companies are the most likely to
switch to NASDAQ. Interpreting the age of the “Other” group is difficult,
since the event that caused the company to be listed in the first place
may be closely tied to its birth (for example, a coincident spin-off and
NASDAQ listing).
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In all cases, the additions to the NASDAQ Composite during the last 14
years have been younger than the incumbents, keeping the median
age lower than it otherwise would have been under natural aging.
TABLE 9: GICS SECTOR OF COMPOSITE COMPONENTS
PCT MARKET CAP
GICS SECTOR
VETERANS
IPOS
COMPANY INDUSTRY
INFORMATION TECHNOLOGY
50%
56%
28%
11%
As mentioned previously, the NASDAQ Composite Index is generally
associated with various High-Technology sectors, Information
Technology in particular. In comparing the industry orientation of
NASDAQ between now and 14 years ago, the only available measure of
industry is the Standard Industry Classification (SIC) system of the US
government. With these definitions, the top SIC industries (at the fourdigit level) now and then are shown in the following table.
CONSUMER DISCRETIONARY
16%
15%
33%
47%
HEALTH CARE
17%
14%
5%
13%
FINANCIALS
7%
5%
9%
11%
INDUSTRIALS
5%
5%
3%
7%
CONSUMER STAPLES
3%
1%
9%
8%
TELECOMMUNICATION
SERVICES
0%
0%
10%
1%
ENERGY
0%
3%
2%
2%
MATERIALS
1%
1%
1%
1%
UTILITIES
0%
0%
0%
0%
TABLE 8: TOP SIC INDUSTRIES LISTED ON NASDAQ
End of 1999
SIC INDUSTRY
End of 2013
PCT OF
MKT CAP
SIC INDUSTRY
PCT OF
MKT CAP
SWITCHES OTHERS
PREPACKAGED
SOFTWARE
23%
PREPACKAGED
SOFTWARE
10%
SEMICONDUCTORS
10%
ELECTRONIC
COMPUTERS
9%
COMPUTER
PERIPHERALS
8%
SEMICONDUCTORS
9%
TELECOM
7%
INFORMATION
RETRIEVAL
6%
Analysis of GICS sectors again confirms the strong IT orientation of the
NASDAQ Composite, with about half of the NASDAQ Composite’s market
cap in the GICS IT Sector. The IPO additions to the Composite have a
sector profile very similar to that of the veterans. Quite interestingly,
however, is the fact that the other additions to the NASDAQ Composite
do not have the same level of technology orientation. The net result
is that the current the NASDAQ Composite has evolved with a lower
technology tilt than before.
ELECTRONIC
COMPUTERS
5%
BIOLOGICAL
PRODUCTS
6%
VALUATION
COMPUTER SYSTEMS
3%
CABLE TELEVISION
5%
TELEPHONE
APPARATUS
3%
PHARMACEUTICAL
4%
A hallmark of the 1990s bubble was the sky-high valuation levels of
NASDAQ-listed companies. The following table shows price/earnings
ratios then and now for a selection of marquee companies.
ALL INFO TECH
57%
ALL INFO TECH
38%
TABLE 10: PRICE/EARNINGS RATIOS OF SELECTED COMPANIES
Figures in the Table 8 provide clear justification for NASDAQ’s tech
reputation. However, comparing the two periods suggests that the
current NASDAQ is less tech heavy than in 1999. The sum of all SIC
industries that may be considered “Information Technology” indicates
a decline in terms of percentage of market cap from 57% to 38%.
Again, one can consider the impact of deletions and additions on
the evolution of NASDAQ’s industry orientation. Instead of using the
SIC system, it is preferable to use a proprietary classification system
that is more up-to-date and better designed for the use of investors.
One such system is the Global Industry Classification Standard (GICS)
system offered by Standard and Poor’s. The following table shows the
sector breakdown of current components of the NASDAQ Composite.
STOCK
END OF 1999
END OF 2013
MICROSOFT
73
13
INTEL
35
14
CISCO
166
13
APPLE
37
14
QUALCOMM
224
19
YAHOO
787
35
The 2013 values of the P/E ratio are much lower relative to their 1999
values. Many components of the NASDAQ Composite in 1999 had no
P/E ratio, owing to a lack of earnings.
Using its proprietary analytics, Bloomberg provides a number of
valuation metrics for indexes as a whole. Here is a set of such metrics
for the NASDAQ Composite index.
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THREE INDEXES DURING TECH BUBBLE
END OF 1999
END OF 2013
PRICE/EARNINGS
152
31
7000
PRICE/BOOK
6.7
3.9
6000
DIVIDEND YIELD
0.11%
1.22%
5000
INDEX EARNINGS
27
133
4000
The typical NASDAQ stock in 1999 did not pay dividends. Companies of
that era were in full-tilt growth mode, and to the extent that earnings
were returned to shareholders, it was in the form of share buybacks.
That is much less true of the current NASDAQ-listed companies. A
good example is long-time dividend holdout Apple, which started
paying a regular quarterly dividend only since 2012.
The NASDAQ-listed companies of 1999 were not necessarily very
profitable—high earnings were expected for the future. The Bloomberg
“Index Earnings” metric is determined by taking aggregate earnings
for the set of components and dividing by the index divisor. This step
allows one to compare earnings for a fixed level of shares (just like
the price index does). This metric indicates 2013 earnings that are
almost five times higher than they were in 1999 for the same number
of shares.
In sum we see a current NASDAQ Composite more conservatively
valued and more profitable than it was in 1999.
NQ COMP DJIA
3000
2000
1000
DEC. 02
JAN. 02
JAN. 01
JAN. 00
JAN. 99
JAN. 98
JAN. 97
0
JAN. 95
The 1999 P/E ratio—again with the benefit of hindsight—seems
otherworldly for such a broad index with more than 4,700 constituents.
Today, it is now at a much more conservative level, though the current
value is still higher than what would be expected for most stocks
(more on this below). The same may be said of the Price/Book ratio.
SP 500
01 JAN 1995 = 1000
JAN. 96
TABLE 11: BLOOMBERG VALUATION METRICS FOR NASDAQ COMPOSITE
While all three indexes rose then fell during the bubble, the pattern of
the NASDAQ Composite deviates from the others in spectacular fashion.
The next graphic shows the performance of the same three indexes
starting in 2005, before the financial crisis and current bull market (all
three indexes rebased to the same value at the start of 2005).
THREE INDEXES DURING CURRENT BULL MARKET
SP 500
01 JAN 2005 = 1000
NQ COMP DJIA
2000
1750
1500
1250
1000
750
PERFORMANCE
A couple of graphical illustrations are useful. First, consider the
Composite compared with the DJIA and S&P 500 before and after the
tech bubble. Note that the following graph rebases all three indexes
so they have a value of 1000 at the start of 1995.
DEC. 13
JAN. 13
JAN. 11
JAN. 09
JAN. 07
The foregoing material showed the NASDAQ Composite of today to be a
more mature, more profitable, and slightly less tech-heavy index than
it was 14 years ago. These changes lead directly to the questions: If
the NASDAQ Composite was different than the other indexes in the
past, is it still so today? Does it still warrant separate mention in the
media and investors’ minds?
500
JAN. 05
NASDAQ COMPOSITE VS. OTHER BROAD INDEXES
During the bull market that preceded the financial crisis, and during
the crisis itself, all three indexes tracked fairly closely. Since the start
of the recovery in 2009, all three indexes have rebounded to precrisis levels, and then continued to grow. However, the Composite,
has clearly grown faster since the trough, indicating some level
of differentiation. So, while the Composite has tracked the other
indexes more closely than during the tech bubble, there is still some
differentiation today.
LONG-TERM PERFORMANCE CHARACTERISTICS
For assessing the long-term characteristics of a set of indexes, it
is important to consider a time frame long enough to span the tech
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bubble/bust and the financial crisis of 2008. The following table
provides information on the Composite along with four other broad
indexes over a 24-year period, starting in 1990. Included in the list of
alternative indexes is the NASDAQ-100.
TABLE 12: PERFORMANCE STATISTICS SINCE 1990
NQ
COMP
S&P
500
AVG ANNUAL PRICE
RETURN
9.58%
7.03%
AVG ANNUAL TOTAL
RETURN
10.22% 9.41% 10.43% 12.65%
METRIC
DJIA
NQ
100
RUSSELL
3000
7.64% 12.18% 7.35%
N/A
STD DEV DAILY PRICE
RETURNS
1.52%
1.16%
1.10%
1.80%
1.16%
CORRELATION W/ COMP
1
0.87
0.78
0.97
0.89
CURRENT MKT CAP ($T)
$6.50
$17.10
$4.70
$4.10
$21.50
chart illustrates the correlation of returns between the NASDAQ
Composite and the other alternatives. It shows, for a date indicated
on the horizontal axis, the correlation between daily returns on
the Composite and the alternative for the previous 12 months. The
correlation is therefore a rolling measure showing how it has evolved
over the years. (Recall that a correlation of one would mean two
indexes move in perfect lockstep, while correlation of zero means
there is no relationship.)
ROLLING CORRELATION OF DAILY RETURNS WITH NQ COMPOSITE
SP 500 NQ 100 DJIA RUSSELL 3000
TRAILING 12 MONTHS
1.0
0.9
0.8
0.7
0.6
In terms of short-term price risk, the two NASDAQ indexes have
exhibited higher volatility than the others. Given what has been
covered in this paper, this result is not surprising. Indeed, in the
specific case of the NASDAQ-100 index, one can see the exceptional
growth opportunities that were available during this time frame, albeit
at the price of higher risk.
In terms of correlations of daily returns we see the expected very high
correlation between the Composite and its close sibling NASDAQ-100.
We see much less correlation with the other broad indexes,
particularly with the DJIA. Again this is not unexpected as the NASDAQ
Composite and the DJIA may be considered largely at opposite ends
of the spectrum: the DJIA representing mature blue chips, the NASDAQ
Composite young growth companies. (Recognizing, though, that the
DJIA contains three NASDAQ stocks: Microsoft, Intel, and Cisco.)
The table also shows the current market cap coverage of each index,
showing the comparatively small coverage of indexes like the DJIA and
NASDAQ-100. The Russell 3000 essentially covers the totality of the US
equity market, thereby allowing one to compare the various indexes
against the entire market.
0.5
0.4
JAN. 14
JAN. 12
JAN. 09
JAN. 06
JAN. 03
JAN. 00
JAN. 97
JAN. 94
0.3
JAN. 91
The table provides two measures of average return: those based
on prices only, and those that include dividends (assumed invested
into the index). During this time frame, the NASDAQ-100 provided the
highest average return, both in terms of price returns as well as the
total returns. Note the relatively large difference in price and total
return for the DJIA, due to a comparatively large dividend yield for
DJIA components.
The graph shows, not surprisingly, a high correlation between
the NASDAQ Composite and the NASDAQ-100. There is much less
correlation with the other indexes, particularly during the 1990s.
The peak of the tech bubble in 2000 marked a point of relatively
low correlation with the DJIA. Since that time, the correlations with
the NASDAQ Composite have increased. During the financial crisis,
correlations were quite high. During the following recovery and bull
market, correlations have fallen a bit, particularly for the DJIA.
The next chart shows annualized daily return standard deviations, again
using the same trailing 12-month method as the previous chart.
ROLLING ANNUALIZED RETURN STANDARD DEVIATION
TRAILING 12 MONTHS
SP 500 NQ COMP NQ 100 DJIA RUSSELL 3000
70
60
50
40
30
20
10
NASDAQ COMPOSITE WHITEPAPER
JAN. 14
JAN. 12
JAN. 09
JAN. 06
JAN. 03
JAN. 00
JAN. 97
JAN. 94
0
JAN. 91
While these performance statistics provide interesting historical
perspective, their forward-looking value may be limited due to the
changing nature of the NASDAQ Composite as documented above.
Consider for example the correlation of daily returns. The following
|
7
During the 1990s, the two NASDAQ indexes were clearly more volatile
than the others, particularly during the tech bubble and its aftermath.
Since that time, there has been greater uniformity in volatility. For
example, the uniformity increases during the financial crisis impacting
all the indexes.
Consider now three dimensions on which the Composite can be
compared with the other broad indexes: industry orientation, company
age, and current valuation metrics. Significant differences between
the NASDAQ Composite and the other indexes remain.
The first is a comparison of industry orientation, as measured using
the GICS system.
TABLE 13: MARKET CAP BREAKDOWN BY GICS SECTOR
PCT OF MARKET CAP
GICS SECTOR
NQ COMP
S&P 500
DJIA
INFORMATION TECHNOLOGY
46%
18%
19%
CONSUMER DISCRETIONARY
20%
13%
13%
HEALTH CARE
15%
13%
10%
FINANCIALS
7%
16%
16%
INDUSTRIALS
4%
11%
20%
CONSUMER STAPLES
4%
10%
8%
TELECOMMUNICATION SERVICES
2%
2%
3%
ENERGY
1%
10%
9%
MATERIALS
1%
3%
2%
UTILITIES
0%
3%
0%
The NASDAQ Composite continues to stand out for its high
representation in the IT sector and low representation in other
sectors, such as Industrials, Energy, and Utilities. While we have
seen that “tech-heavy” is perhaps less appropriate than it was in
1999, the term still fits when comparing the NASDAQ Composite with
other broad indexes.
Consider now company age. FactSet Data Systems provides the year
of company founding for all US stocks. The following table provides
weighted median founding years. For the NASDAQ Composite and
S&P 500, market caps were used as the weighting. This means that
for the indicated median, half of the market cap is from companies
founded after that year, half before that year. For the DJIA, which is a
price-weighted index, the weights are the closing prices of the index
components (as of the end of 2013).
TABLE 14: INDEX-WEIGHTED MEDIAN YEAR OF FOUNDING
INDEX
YEAR
NQ COMPOSITE
1985
NQ 100
1984
S&P 500
1958
RUSSELL 3000
1968
DJIA
1908
The NASDAQ Composite (and NASDAQ-100) exhibit higher valuation
multiples than the other indexes. Composite components
continue to pay fewer dividends, and are a bit less profitable than
components of the other indexes. These metrics are consistent with
the idea that the NASDAQ Composite is more representative of the
growth sector of the economy.
In sum, there is no doubt that the differences in the NASDAQ
Composite and other broad indexes are not as substantial as they
were during the height of the tech bubble 14 years ago. The NASDAQ
Composite, however, continues to differentiate itself as the home to
companies that are younger and more growth oriented.
DATA SOURCES
The data used in most of the analyses presented in this paper are from
various internal NASDAQ OMX sources. NASDAQ OMX maintains detailed
information on its listings. It also maintains extensive databases of
pricing information for individual securities and indexes.
Tables 9 and 13 use Standard and Poor’s GICS sector classification as
provided by Bloomberg.
Tables 10 and 11 use valuation data provided by Bloomberg.
The average price and total return values in Table 12 are provided by Bloomberg.
The results in Table 14 are based on data provided by FactSet Data Systems.
Data used in the charts and elsewhere in this paper are from internal NASDAQ OMX
sources, Bloomberg, FactSet, or Yahoo Finance.
DISCLAIMER
NASDAQ® ,and NASDAQ OMX®, NASDAQ-100®, NASDAQ-100 Index®,
NASDAQ Composite®, NASDAQ Composite Index®, and The NASDAQ Stock
Market® are all registered trademarks of The NASDAQ OMX Group, Inc.
The information contained above is provided for informational and
educational purposes only, and nothing contained herein should
be construed as investment advice, either on behalf of a particular
security or an overall investment strategy. Neither The NASDAQ OMX
Group, Inc. nor any of its affiliates makes any recommendation to buy
or sell any security or any representation about the financial condition
of any company. Statements regarding NASDAQ-listed companies or
NASDAQ proprietary indexes are not guarantees of future performance.
Actual results may differ materially from those expressed or implied.
Past performance is not indicative of future results. Investors should
undertake their own due diligence and carefully evaluate companies
before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS
STRONGLY ADVISED.
© COPYRIGHT 2014. THE NASDAQ OMX GROUP, INC. ALL RIGHTS RESERVED. NASDAQ OMX AND NASDAQ ARE REGISTERED SERVICE/
TRADEMARKS OF THE NASDAQ OMX GROUP, INC. Q14-0618