Investing in the future economy through the Nasdaq

Investing in the future economy through the Nasdaq
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Despite the negative impact that Covid-19 has had on businesses globally, the stocks of technology giants such as Facebook, Apple, Microsoft, Amazon and Alphabet were able to rebound quickly after a brief market collapse in March 2020. By the end of that year, they were the main drivers of market growth.

The outperformance was due to the role that technology plays in keeping people connected and productive during the pandemic. Industries are disrupted by technology as people change the way they live and work. Technology has become more relevant than ever across industries.

That’s not to say, of course, that technology counters are free from risks. In March this year, technology stocks faced a round of sell-offs as the Russia-Ukraine war escalated. Crackdowns by regulators in China also dramatically affected tech stocks, as did the global supply chain crisis.

While these events may continue to roil markets, the long-term story of technology remains. The pandemic has accelerated the digital transformation of companies and innovation will lead to higher productivity and economic growth, according to the Organisation for Economic Co-operation and Development.

At this time, the Nasdaq’s indexes, such as its flagship Nasdaq-100 (NDX), continue to be an important way for investors to get exposure to the technology sector. It is also a gateway for investors into the future economy. Afterall, the World Economic Forum estimates that 70% of new value created in the economy over the next decade will be based on digitally enabled platform business models.

Roots in technology

Since the beginning, the Nasdaq brand has been synonymous with technology and innovation. The company introduced the world’s first electronic stock market in 1971 and, in the following decades, launched the initial public offerings (IPOs) of iconic tech companies such as Apple, Amazon, Microsoft and Cisco.

The relevance of the Nasdaq’s strength in technology has only increased in recent years, as the fast pace of technological innovation has boosted the profiles and returns of the world’s top tech companies.

The NDX includes 100 of the largest domestic and international non-financial securities listed on the Nasdaq. Technology companies comprise about 56% of its index weight, followed by consumer services companies at 22%.

In 2020, the Nasdaq welcomed 316 IPOs, including that of prominent tech-enabled companies like Airbnb, Warner Music Group and Royalty Pharma. Its win rate of venture capital-backed listings remains at a high 90%.

Investors who want exposure to big technology names, as well as new and emerging players, will be able to do so via the NDX. By comparison, its main competitors, the S&P 500 and the Dow Jones Industrial Average, track the biggest 500 and 30 US companies respectively. These are more often used by investors to get a general view of the US market instead of gaining exposure to technology, which is the fastest growing sector of the economy.

Driver of returns

The NDX’s heavier allocation to technology, consumer services and healthcare has helped it outperform the S&P 500, its closest competitor, by a wide margin over the past decade (Dec 31, 2007 to March 31, 2021).

Comparing the total annual returns of both indexes (dividends are reinvested), the Nasdaq-100 TR Index outperformed the S&P 500 TR in 11 out of 13 years, according to the Nasdaq’s research. Since 2003, the NDX has posted a compound annual growth rate of 21% in earnings and 26% in dividend value.

The Nasdaq also has other indexes exposed to the latest technologies and innovation. For instance, the Nasdaq Biotechnology Index (NBI) was launched in 1993, when the biotech industry was in its infancy. Now, it has 373 companies (as at Dec 20, 2021). The number of additions to the index has picked up significantly over the past two years, thanks to the many biotech companies that listed on the Nasdaq.

The case for investing in biotech companies gained ground in the last year as pharmaceutical companies raced to develop vaccines against Covid-19. These companies — AstraZeneca, Moderna, BioNTech and Novavax — are constituents of the NBI.

There was also significant progress made in traditional drug development and cutting-edge therapeutics like gene editing last year, benefiting various companies on the index.

The NBI has become an effective benchmark solution for the sector, given that the Nasdaq has won more than 98% of biotech company IPO listings in the past three years. Its constituent count is roughly double that of the S&P Biotechnology Select Industry Index.

The returns of NBI are up 1.9% year to date (as at Dec 17, 2021), mostly due to the weakness in small-cap biotech players. NBI’s modified market-cap weighting approach, however, offset the declines in small-cap stocks with the strength of larger biotech companies. The equivalent index by S&P posted a return of -17.6% over the same period.

Wide possibilities for investors

Indexes are generally used by investors to get a quick overview of the market. Depending on the provider, each index is built using a particular methodology to choose and weight stocks.

Index providers such as the Nasdaq license their indexes to fund managers, asset managers and other parties to create a variety of financial products, whether it uses active or passive strategies. This includes exchange-traded funds (ETF), exchange-traded notes, structured products, futures and options contracts, mutual funds and fixed and variable annuities.

According to the Nasdaq, its indexes currently power more than 9,000 structured products around the world. Meanwhile, the current value of ETFs tracking the index is over US$180 billion and are traded in 30 countries. The Invesco Nasdaq 100 ETF, iShares Nasdaq-100 UCITS ETF and the Global X Nasdaq 100 Covered Call ETF are some examples.

Investors can also trade Nasdaq-100 options and futures contracts. For instance, there’s the Nasdaq-100 Reduced-Value Index Options and CME E-mini Nasdaq-100 Futures.

The flexibility of the Nasdaq’s suite of products allows investors to invest in the future economy through a variety of methods. It also has fixed income and smart beta indexes for investors who want to diversify their portfolios.

Click to understand more about Nasdaq Global Index.