How to invest in the Nasdaq
Editorial staff, J.P. Morgan Wealth Management
- The Nasdaq exchange is a U.S.-based stock market where securities are bought and sold.
- The Nasdaq Composite (sometimes referred to as the Nasdaq index) tracks the performance of selected companies listed on the Nasdaq exchange.
- You can invest in either specific companies listed on the Nasdaq exchange or funds that mimic the performance of a Nasdaq index, like the Nasdaq Composite.
What is the Nasdaq?
The National Association of Securities Dealers Automated Quotations (Nasdaq) often refers to both the U.S.-based securities exchange – the second biggest U.S. stock market exchange after the New York Stock Exchange – and the Nasdaq Composite, a stock market index that includes a large number of the stocks listed on the Nasdaq stock exchange.
The Nasdaq has become associated with tech stocks as many prominent tech companies had their initial public offerings on the Nasdaq. Some tech stocks have performed particularly well over the last few decades, which in turn has led to the strong performance of Nasdaq indexes. For instance, the Nasdaq 100, a focused index within the Nasdaq, has outperformed the S&P 500 every year since 2007. Despite this, it can’t be assumed that the Nasdaq will keep seeing these relatively high returns in the future. As is always true in investing, past returns do not guarantee future returns.
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What are the indexes that track Nasdaq-listed companies?
There are numerous indexes within the Nasdaq. A stock market index is a measurement tool that tracks the performance of a selected group of stocks. Some of the most well-known indexes related to the Nasdaq are the Nasdaq Composite, the Nasdaq-100 and the Nasdaq US Small Cap Index.
The Nasdaq Composite is the broadest and most comprehensive index tracking Nasdaq-listed companies.
The Nasdaq Composite includes only Nasdaq-listed common stocks, but not every Nasdaq-listed security. Like most major stock indices, the Nasdaq Composite is weighted by market capitalization of its underlying components. This means that when larger companies’ stocks move, it has a greater effect on the performance of the index than when the stocks of smaller companies move.
The Nasdaq-100 includes 100 of the Nasdaq’s largest non-financial companies. The types of companies included in the Nasdaq-100 are broken down into the following industries:
- Technology
- Consumer discretionary
- Health care
- Industrials
- Telecommunications
- Consumer staples
- Basic materials
- Utilities
- Energy
- Real estate
Another index of note is the Nasdaq US Small Cap Index. This index tracks small-capitalization companies within the Nasdaq. It is composed of about 2,000 companies.
What are the requirements for Nasdaq inclusion?
Many exchanges have requirements that a company must meet to be listed. These factors may include bid price, earnings, market capitalization and more.
A company can get listed on the Nasdaq exchange by meeting specific financial and corporate governance requirements, including minimum market capitalization, shareholder equity and trading volume thresholds. The company must file an application with the Nasdaq and then undergo a review process.
The requirements to get included in a Nasdaq index are slightly different. The Nasdaq Composite index includes most equity securities listed on the Nasdaq. The Nadaq-100 has a more focused list of requirements including thresholds for trading volume, market capitalization and more.
Can I invest directly in the Nasdaq?
Keep in mind, when you hear the word Nasdaq, it could be referring to either the exchange or an index – likely the Nasdaq Composite. You can invest directly in individual companies listed on the Nasdaq exchange. You can’t invest directly in market indexes, like the Nasdaq Composite, but you can gain exposure to them via investment vehicles like exchange-traded funds (ETFs) and mutual funds that mirror their performance.
We’ll cover these options in more detail below.
Nasdaq-listed stocks
The stocks listed on the Nasdaq exchange can range from household names to newer, high-growth companies. Investors have the ability to purchase shares of stock of companies listed on the Nasdaq exchange through a brokerage account or retirement account that allows for the purchase of individual stocks.
Nasdaq index funds
Nasdaq index funds are another popular way for consumers to invest in a fund that mirrors the performance of the Nasdaq Composite or other indexes that track the performance of Nasdaq-included companies, like the Nasdaq-100. Index funds can be structured as ETFs or mutual funds.
Nasdaq-focused ETFs or mutual funds
Beyond index funds, there are Nasdaq-focused ETFs and mutual funds that may use active management or specialized strategies rather than simply tracking an index. These funds offer exposure to companies listed on the Nasdaq.
How to start investing in the Nasdaq
Before you start investing in anything – whether it’s a single company listed on the Nasdaq or a fund that tracks an index like the Nasdaq-100 or the Nasdaq Composite – you should decide where you want to hold those shares. Options to consider can include certain retirement accounts as well as brokerage accounts.
How much does it cost to invest in the Nasdaq?
When it comes to investing in an individual stock listed on the Nasdaq exchange, the cost will depend on the company’s share price. Investors may also have the option to buy fractional shares, which allow for the purchase of a portion of a share of a stock, rather than the whole share.
When it comes to purchasing shares of a Nasdaq-focused fund – be it an ETF or a mutual fund – you may want to pay attention to both the fund’s share price and its expense ratio. A fund’s expense ratio is the annual fee charged by a mutual fund or ETF, expressed as a percentage of your investment, that covers the fund’s operating costs including management fees, administrative expenses and other operational charges.
What are the pros and cons of investing in the Nasdaq Composite Index?
Like with any investment decision, there are many pros and cons to weigh as you consider whether to invest in a fund that mirrors the performance of the Nasdaq Composite Index.
What are some of the benefits of investing in the Nasdaq Composite Index?
Investing in a fund that tracks the performance of the Nasdaq Composite Index grants exposure to some of the top tech companies. Tech investments have been a cornerstone of the American and global economy for decades. And now, as artificial intelligence (AI) continues to revolutionize just about everything, tech investments could be beneficial for your portfolio.
Another benefit is that investing in a fund that tracks the performance of the Nasdaq Composite Index offers diversification by design; you’ll gain exposure to a range of companies and not be dependent on a single company to perform well.
What are some of the disadvantages of investing in the Nasdaq Composite Index?
A disadvantage of investing in a fund that tracks the Nasdaq Composite Index would be that it could result in your investment portfolio being overweighted in a single direction. For example, if your investments consist entirely of shares of a fund tracking the Nasdaq Composite and companies listed on the Nasdaq, then you may be too heavily weighted in one sector such as tech.
When you’ve invested too much money in one sector of the economy, then your portfolio may take a hit if something negative broadly affects the sector (e.g., unexpected government regulatory changes).
The bottom line
Investing in a fund that mimics the Nasdaq’s performance can give you access to some of the most prominent companies in the world with large growth potential.
Still, just like with any investment decision, it’s wise to compare it with the rest of your portfolio’s allocation and determine if it’s the right fit based on your unique risk tolerance, asset allocation, retirement timeline and other factors.
Frequently asked questions about how to invest in the Nasdaq
The decision to invest in a fund that mimics the Nasdaq’s performance should be made within the context of your entire portfolio. Failing to consider your overall allocation could cause your portfolio to wind up being overweighted in certain sectors, which means you’ll assume more risk than necessary.
If you’re already investing in an index fund that follows the total stock market or the S&P 500, then there may be some overlap if you decide to invest in a Nasdaq-mirroring fund. Additionally, you may already own shares of funds that are tech-oriented, which could lead to replication if you also invest in Nasdaq-focused funds.
Companies get no guarantee that they’ll stay in the Nasdaq Composite Index or Nasdaq-100. If a company’s market capitalization dips below Nasdaq requirements, then it may be delisted from the exchange, and therefore removed from the Nasdaq Composite Index.
The Nasdaq-100 has more stringent requirements for inclusion. Annually the Nasdaq-100 conducts a reconstitution, evaluating the companies included in the index.
If you’re interested in investing in the agriculture sector, take a look at the Nasdaq Commodity Index Family. This is a commodity index that includes agricultural products as well as energy, industrial metals, precious metals and livestock.
The S&P 500 includes publicly traded companies with the 500 largest market capitalizations listed on stock exchanges in the U.S.
There are some major differences between the Nasdaq-100 and the S&P 500. One of the differences is that the S&P 500 includes 500 companies, while the Nasdaq-100 only includes 100. The broader scale of the former index – as well as its diversity across sectors – means that it also has a lower beta, which generally translates to less volatility.
Speaking to sector diversity in the indexes, 59% the companies in the Nasdaq-100 are in the tech industry compared with 34% in the S&P 500.
Conversely, about 10% of companies in the S&P 500 are in the financial industry (versus 0% for the Nasdaq-100). Both indexes are fairly equal when it comes to the representation of basic materials and consumer staples.
From a returns perspective, a 2024 analysis showed that the total returns of the Nasdaq-100 had outperformed the S&P 500 in 12 out of the past 16 years. During that time, tech companies have done well; since the Nasdaq-100 is more heavily weighted in tech than the S&P 500, the Nasdaq-100 has seen higher gains in turn.
It’s important to note that investors shouldn’t just look at past returns when making an investment determination, as they don’t guarantee future results.
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Editorial staff, J.P. Morgan Wealth Management
