Nasdaq 100 and S&P 500 difference: When planning to diversify your portfolio, investing in the stock market is smart. Besides the potential to generate high returns, it can work to mitigate the risk of other investments. Thankfully, globalisation has enabled Indian investors to tap into the US stock market alongside investing in the local market.
The Nasdaq 100 and S&P 500 are two of the most popular indices globally owing to their historical performances. Both these indices list popular US stocks across a diverse range of sectors. Both Nasdaq 100 and S&P 500 consist of large-cap companies, and you may find known names in the top holdings.
While S&P 500 is the oldest index formed in 1957, Nasdaq 100 was the first electronically created stock exchange in 1971. While you may find a few similarities in the company names across both these indices, there are a few differences when you compare Nasdaq 100 vs S&P 500.
To know how they differ, read on.
Nasdaq 100: A Brief Overview
Nasdaq is the second largest stock exchange with regard to securities values. With more than 3,000 companies listed, the formation of this electronic stock exchange helped investors sell and buy US stocks with ease.
The Nasdaq stock exchange comprises three indices such as:
- Nasdaq 100
- Nasdaq Composite
- Nasdaq Financial 100
Simply put, the Nasdaq exchange is an electronic marketplace with a few top names, such as Apple, Amazon, etc.
S&P 500: Critical Points to Consider
With S&P 500 being the oldest index of the US stock market, the term is an acronym for Standard & Poor 500. This index includes some of the top 500 US companies covering 11 sectors.
The shares of these companies cover up to 80% of the total US stock market value. In simple words, when mentioning the performance of the stock market, it means you are referring to the S&P 500 index. This acts like a stock market indicator that helps you measure the performance of the stock market.
Since Nasdaq 100 and S&P 500 differ from each other in terms of sector allocation or the number of companies they track, there are differences in their performances as well.
When you invest in US stocks tracking these indices, you get to understand the proper working of Nasdaq 100 and S&P 500 indices. Note that despite having top holdings such as Apple and Microsoft, the total sector allocation is less than 30%.
While Netflix and Facebook (Meta) are a few biggies listed in the Nasdaq 100 index, the S and P 500 index consists of JP Morgan Chase, Tesla, Berkshire Hathaway, etc.
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Nasdaq 100 vs S&P 500: Key Differences You Must Know
On comparing the Nasdaq 100 vs S&P 500, one of the critical differences lies in the number of companies these indices track. The former monitors the performance of 100 international and domestic non-financial stocks available on the Nasdaq stock exchange.
On the contrary, S&P 500 assesses the performance of the top 500 companies in the United States. Note that this index is market cap-weighted, which simply means index components having a high market capitalisation get a better weightage.
While information technology leads the chart on S&P 500 with the highest weighting of 25.8%, the tech stocks dominate the Nasdaq 100 index. Hence, it is also called the tech index.
Apart from this, Nasdaq 100 covers other sectors such as industrial, consumer goods, healthcare and consumer services. However, S&P 500 index includes the financial sector, unlike Nasdaq 100.
Other top sectors included in the S&P 100 index include the following:
- Information Technology
- Communication services
- Healthcare
As the S&P 100 index covers 80% of the total US stock market, this is one of the most preferred indices that helps you analyse the performance of the stock market.
On the contrary, there are only limited companies and sectors in Nasdaq 100, thereby marking its representation lesser when you compare Nasdaq 100 vs S&P 100 indices. However, you can rely on Nasdaq 100 as well, owing to its historical performance over the years.
On comparing the performances of both these indices, Nasdaq 100 has an average 10-year return for the past 15 years has been approximately 9%. However, in the case of the S&P 500, the returns stood at 5%.
As Nasdaq 100 has primarily companies from a single sector, it tends to be more highly concentrated than S&P 500. Hence, there is a higher volatility in Nasdaq 100 returns when compared to the S&P 500 index.
As S&P 500 has better diversification in terms of both companies and sectors, the concentration risk is comparatively lower. Though there are a few prime differences between both these indices, the choice you make depends on your investing strategy.
Ideally, you need to assess the returns and make an informed decision. Another pointer to consider is the outsized allocations to Consumer Discretionary and Technology sectors. This is what propelled the Nasdaq 100 to generate high returns since the pandemic.
Despite the rising inflation and varying interest rates, there has been a positive growth trend in the performance of these industries. Furthermore, with technology advancing by leaps and bounds, it is quite possible to see a positive growth trend of the Nasdaq 100 in the future as well.
With Nasdaq 100 and S and P 500 differing in their construction method and weighting, it is critical to scrutinise the differences carefully and analyse the best US stock market index according to your investment goals.