Two popular measures of Nasdaq-listed stocks, the Nasdaq Composite and the Nasdaq-100, are often confused. Knowing and understanding the difference between the two just got more important, especially if you're an investor looking for exposure to the "Magnificent Seven," the seven soaring stocks that spawned the new bull market we're in.
So let's start at the beginning: Nasdaq stands for National Association of Securities Dealers Automated Quotations.
Years ago, in early 1971, when so-called "listed" stocks traded exclusively at physical exchanges like the New York Stock Exchange and all orders to buy and sell a stock had to be routed through a single "specialist" trader at his post on the Exchange, whose job was to match incoming buy and sell orders and fill standing orders written in his "book," a fledgling computer bulletin board-type system was turned into the world's first electronic stock market by the National Association of Securities Dealers.
NASD broker-dealers called their electronic exchange Nasdaq, simply adding Automated Quotations to the Association's acronym, because their quotes to buy and sell stocks were automated on computers and not routed to a physical exchange.
With the advent of a new type of exchange came new measures of stocks listed there. The principal index, or measure of value of stocks listed on Nasdaq is the Nasdaq Composite. The Composite, more frequently referred to in the media as simply The Nasdaq, is made up of more than 3000 Nasdaq listed stocks. And because technology companies prefer listing on Nasdaq, it's considered a tech index.
Back in 1985, the Nasdaq-100 was launched. There are actually two Nasdaq-100s. The Nasdaq-100 consists of the 100 largest non-financial companies (based on capitalization) in the Nasdaq, and the Nasdaq Financial-100 consists of the 100 largest financial companies listed on Nasdaq.
For our purposes we'll be talking about the Nasdaq-100, which is predominated by giant tech companies.
Both the Nasdaq Composite and Nasdaq-100 are capitalization weighted indexes. Capitalization weighting is an index construction methodology where individual components are weighted according to their relative total market capitalization. A company's market capitalization is simply the number of common shares outstanding times the price of the stock. The higher a company's capitalization and cap-weighting the more influence it has on any cap-weighted index it's included in.
For example: Apple's weighting in the Nasdaq Composite is currently about 13.79%. It has the largest weighting in the index, on any index it's in, in fact, because Apple is currently the largest company in the world with a total market capitalization of $3.08 trillion (15.73 billion shares x $191/share; as of 8-3-23).
Currently, the seven largest companies with the greatest influence on the Nasdaq Composite because of their cap-weightings are: Apple at approximately 13.79%, Microsoft at approximately 11.44%, Amazon at 6.04%, NVIDIA at 4.72%, Tesla at 3.75%, Google/Alphabet at 6.42%, and Facebook/Meta at 2.87%. Collectively those seven stocks represent 49.03% of the Nasdaq Composite, so they move the index up and down as their prices move up and down. That's why above I note their cap-weightings as "approximately," because they change as the price of each stock changes.
It just so happens those seven stocks are now called the Magnificent Seven because of how high they've risen off last October's lows and how they've skyrocketed in 2023, essentially powering the indexes they're in, including the S&P 500, into bull market territory.
Now that you know the Nasdaq Composite consists of more than 3000 stocks and the Nasdaq-100 consists of only the 100 largest non-financial companies listed on Nasdaq, you probably figured out the Nasdaq-100, with the same seven stocks headlining that index, must have outperformed the Nasdaq Composite since last October and this year. And you'd be right.
From the beginning of 2023 through July 19, 2023, the Nasdaq Composite was up 37.18% and the Nasdaq-100 was up 44.6%. The 100 beat the Composite because the total weighting of the Magnificent Seven in the 100 is more than 55%, compared to the Composite's 49%.
Investors mostly play the Nasdaq-100 by buying the Invesco QQQ Trust Series 1 (QQQ), also known as "the Qs," which is an ETF that tracks the Nasdaq-100.
Here's the twist.
Because the Nasdaq-100 has rules about capital weightings becoming too big, they rebalance the index by reapportioning the weighting of companies whose cap-weighting are more than 4.5%. They don't do it regularly or they'd have rebalanced the index hundreds of times over the past few years.
But they just did a "Special Rebalancing." Effective July 24, 2023, the combined cap-weighting of the Magnificent Seven in the Nasdaq-100 was knocked down to just over 43% from just over 55%.
That means the Nasdaq Composite, where the Magnificent Seven account for more than 49% of that index's capitalization weighting, will perform better than the Nasdaq-100 if the Magnificent Seven continue to power the stock market higher.
It just so happens there's an ETF that tracks the Nasdaq Composite, if you want to trade that as opposed to the Qs. It's the Fidelity Nasdaq Composite Index ETF (ONEQ).
It's up to you. If you're looking for exposure to the Magnificent Seven, like a lot of institutional traders and money managers are, you can buy the Qs or the Composite by buying ONEQ.
I know which one I'll buy - the latter.
Of course, we all know the reason the Magnificent Seven are continuing to fly so high: artificial intelligence. Each one of those companies stands to seriously benefit from AI tech, and we're much closer to what experts call "the AI Singularity" - the exact second when AI unshackles itself from its programmed limitations, instantly growing billions of times more powerful - than we think.
In fact, it could happen in the next three months, according to a new indicator developed by experts.
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The post This Is the Smartest Way to Invest in the "Magnificent Seven" Right Now appeared first on Total Wealth.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.