The US-based Nasdaq – National Association of Securities Dealers Automated Quotations – is the world’s second-largest stock market behind the New York Stock Exchange (NYSE).
In 2023, with a market capitalisation of around $24 trillion, the Nasdaq offers investors a platform to trade thousands of US companies, including global titans such as Microsoft, Apple and Tesla.
But how does the Nasdaq work? And how can retail investors gain exposure to it? We take a look.
What is the Nasdaq?
The Nasdaq is an exchange where investors can buy and sell around 3,700 stocks and shares.
At launch, it offered a new way for investors to trade using automation and without doing so in-person on a physical exchange floor – the most common means of executing share trades at the time.
Today, all-electronic trading is commonplace and anyone – from professional investor to enthusiastic amateur – can manage a share portfolio from a trading platform on his or her smartphone.
According to Nasdaq, over four billion shares were traded on the exchange on a daily basis in February this year.
The exchange is open for trading between 9.30am and 4pm Eastern Time Monday to Friday. The exchange also offers both pre-market and after-hours extended trading – from 4am till 9.30am and 4pm till 8pm respectively.
Nasdaq itself is a publicly-owned company, trading its shares on its own exchange under the market ticker symbol NDAQ.
Which companies make up the Nasdaq?
Tertius Bonnin, assistant portfolio manager at EQ Investors, says: “Over several years, the Nasdaq has become the stock exchange of choice for companies in the information technology and biotechnology sectors, propelling the exchange’s reputation as a powerhouse of growth companies.”
The Nasdaq’s constituent companies tend to be skewed towards tech-orientated businesses traditionally making it a bellwether for the wider technology sector. Investment experts say it’s wrong, however, to think of the Nasdaq as being a ‘tech-only’ exchange.
Ben Yearsley, investment director at Shore Financial Planning, describes this as a myth worth dispelling: “It just happens that many of the biggest companies are in information technology. In fact, tech stocks only account for half, though there is a quirk here in that the second biggest sector, consumer discretionary, also includes stocks that many think of as technology, including Netflix and Tesla.”
Nasdaq Composite and Nasdaq 100
Given its overall size and the companies that participate on the exchange, the Nasdaq often appears in the financial news headlines.
But when the media refers to the Nasdaq, outlets are usually referring to one of two related stock indices, instead of the exchange itself: the Nasdaq Composite Index and the Nasdaq 100.
The former comprises around 3,000 common stocks listed on the exchange, while the latter tracks 100 of the largest and most actively traded securities .
The Nasdaq Composite and the Nasdaq 100 both use the same modified market capitalisation weighting method in which the closing price of each stock is multiplied by the total number of shares to arrive at its market capitalisation.
Share weights are worked out by dividing each security’s market cap by the total capitalisation of all the index’s securities. Share weights for each company are then multiplied by that stock’s closing price and the total divided by an index divisor that accounts for market fluctuations such as stock splits, mergers, etc.
The result is the day’s Nasdaq average.
Performance of the Nasdaq indices
Thanks to a cocktail of economic conditions, including soaring inflation levels, rising interest rates, and the war in Ukraine, last year was challenging for stocks and shares investors of all kinds. For those with exposure to the Nasdaq, 2022 was a horror show.
On the final trading day of 2022, the Nasdaq Composite ended the year down an eye watering 33.1%. This compared with a decline of about 19% for the S&P 500 index of 500 companies listed in US exchanges.
In contrast, the FTSE 100 index of leading UK shares – where ‘old economy’ stocks from the mining, energy and financial sectors hold sway – closed out December about 1% up on the year.
The Composite was particularly badly hit because the factors mentioned above stoked fears of recession – tech companies historically perform poorly during economic downturns as investors seek out more stable investments.
Many tech companies also rely on advertising income for a large portion of their revenue. As other companies cut advertising budgets in response to recession fears, high-profile names such as Alphabet and Meta saw ad revenues fall.
The strengthening of the US dollar also played a role in the Nasdaq’s demise in 2022 as US multinationals received less money from their international operations.
Prior to last year, however, Nasdaq stocks had historically outperformed the S&P 500. For example, in the five years to July 2022, the S&P 500 rose about 60%. An impressive enough return over the period until you remember that the Nasdaq Composite increased by around 88% over the same time, while the Nasdaq 100 soared by 113%.
In these instances, the fact that both Nasdaq indices were tilted to tech and services contributed as much to the eye-catching performances of previous years as it did to when they faltered in 2022.
Shore Financial Planning’s Ben Yearsley says: “The Nasdaq took a pummelling last year. In effect, there weren’t any oil stocks or similar to protect investors as there were with, say, the FTSE 100.
“As the pursuit of growth fell out of favour as an investment style, then so did the Nasdaq. Higher interest rates aren’t good for high growth stocks. But as the US Federal Reserve changes its monetary policy and pivots away from an ongoing series of interest rate hikes, then investors can expect the Nasdaq to fly once again.”
And that, in effect, has been what has happened since the start of 2023 with things looking much more optimistic. Year-to-date (mid-July) the Nasdaq Composite is up nearly 40%.
Marcus Cave, analyst at Quilter Investors, says: “Investors should be aware that more speculative assets have been leading the rally, including lower quality and more interest-rate sensitive parts of the equity market, while crypto and meme stocks have also reacted positively to central bank announcements.
“Interestingly, we have seen retail trading volumes surge, and these investors often favour more speculative assets.”
How to invest in the Nasdaq
A popular and effective way to invest in the Nasdaq is via either an exchange-traded fund (ETF) or an index tracker fund.
These are ‘passive’ investments which rely on computer algorithms to replicate a particular index.
According to Rob Burgeman, senior investment manager at wealth manager RBC Brewin Dolphin, investors looking to gain a foothold in the Nasdaq should consider ETFs. “They are the simplest way for investors to get exposure. Think of them as cheap, cheerful, and doing what they say on the tin.
“For example, the Invesco EQQQ Nasdaq 100 UCITS ETF charges 0.3% and fully replicates the Nasdaq 100 Index.”
In this example, a £1,000 investment would therefore cost £3 although, depending on how/where the fund was bought – via an investment trading platform, for example – there may be additional dealing costs to factor in as well.
The charges levied by an ‘active’ fund – one relying on human judgment for stock selection – can be 10 times higher than for a passive alternative.
Ben Yearsley suggests participation in the Nasdaq via the iShares Nasdaq 100 or L&G Global Technology Index funds.
The former is an ETF that offers targeted exposure to 100 of the largest non-financial companies listed on the Nasdaq.
The latter is an index fund designed to track the performance of the FTSE World Technology Index (rather than the Nasdaq). But with a top 10 of holdings that includs Apple, Microsoft, Alphabet (Google’s parent company) and the tech company Nvidia, there is plenty of crossover with Nasdaq-listed companies.
