NASDAQ 100 vs. NASDAQ Composite: A Detailed Breakdown of NASDAQ

Key Points

• The NASDAQ 100 and NASDAQ Composite are both stock market indexes tracking a particular group of companies.
• Stock market indexes can be used to gauge overall market performance or the performance of individual sectors.
• The NASDAQ 100 and NASDAQ Composite have some overlap, but the criteria for inclusion differ greatly.

Looking to invest in the tech sector? Then you’ll likely be looking at NASDAQ stocks, but the NASDAQ is a huge exchange, and investors need ways to break down the components for analysis. That’s why the NASDAQ 100 and NASDAQ Composite exist, so investors can have different ways to gain exposure to NASDAQ-listed stocks. However, these indexes have major differences that investors must understand in order to construct proper portfolios. Read on to learn more about the NASDAQ 100 and the NASDAQ Composite.

The NASDAQ Composite includes all the stocks in the NASDAQ 100, plus about 2,500 more. The NASDAQ 100 limits its components to the largest 100 non-finance stocks trading on the NASDAQ exchange, but the Composite includes all public companies trading on the exchange. 

These are the 2 most commonly used indexes for NASDAQ investments, and a wide array of ETFs and mutual funds have been constructed around them. But with thousands of companies differentiating the two, it's important to understand the risks and rewards of investing in each.

What Are Stock Market Indexes?

Analyzing every stock would be impossible. The World Federation of Exchanges estimated that as of 2022, over 58,000 public companies exist worldwide, with an estimated 5,000 to 6,000 trading on US-based exchanges. And that doesn’t even take into account penny stocks trading over the counter.

Instead of analyzing each stock individually, investors can use stock market indexes as proxies for the overall market or specific sectors and subsectors. For example, the Dow Jones Industrial Average (DJIA) is one of the oldest stock indexes, consisting of 30 large-cap stocks focused on older sectors like industrials and consumer staples.

The NASDAQ 100 and NASDAQ Composite are both examples of stock market indexes. The NASDAQ Composite is a list of all public companies trading on the NASDAQ exchange, one of the largest public exchanges focusing on tech and innovation. The Composite comprises thousands of stocks, ranging from large-cap tech giants to small-cap startups. The NASDAQ 100 also consists of stocks in the NASDAQ exchange but with a more narrow view and stringent rules for inclusion. All NASDAQ 100 stocks are included in the Composite, but only the biggest non-finance firms find themselves in the NASDAQ 100.

Key Differences Between NASDAQ 100 and NASDAQ Composite

 

Both the NASDAQ 100 and NASDAQ Composite track stocks trading on the NASDAQ exchange, which was the first major stock exchange  to utilize electronic order books and computerized trading. Naturally, a computer-based exchange will lean heavily into the tech sector, but the NASDAQ is a massive exchange featuring more than 2,500 stocks. If you want to successfully invest in NASDAQ, you’ll need to differentiate between these 2 indexes.

Size 

The biggest difference between the 2 indexes is obvious as soon as you look at their components. The NASDAQ 100 is aptly named since it features around 100 of the largest companies on the NASDAQ exchange, an adjusted quarterly list. The NASDAQ Composite tracks all companies trading on the exchange, from the small caps to the mega caps.

Sector Allocation

Both indexes weigh holdings based on a market capitalization formula, but the NASDAQ 100 has a few additional rules for inclusion. While the Composite tracks stocks of all different sizes across various sectors, the NASDAQ 100 tracks only the 100 largest non-finance firms trading on the exchange. The index features companies from different sectors, but it’s heavily tilted toward large-cap tech stocks. If you want exposure to a more diverse group of sectors, you’ll likely prefer the NASDAQ Composite’s methodology.

Market Capitalization

Diversification can sometimes be a double-edged sword. While you should never put all your capital into a single stock, an extensive index might include shares of companies you’d prefer to avoid. The NASDAQ Composite is a vast group of companies; many are small startups with risky outlooks. The index is cap-weighted, so small caps never get too much exposure, but the NASDAQ 100 narrows its holdings to only the largest and most successful NASDAQ companies. The differences may seem subtle, but as you’ll see below, the performances of the 2 don’t always track in lockstep. 

Historical Performance of NASDAQ 100 and NASDAQ Composite

Investing in indexes like the NASDAQ 100 and NASDAQ Composite has been simplified thanks to the hundreds of ETFs and mutual funds using them in their strategy. The NASDAQ Composite is quoted next to the Dow Jones and S&P 500 on financial media. However, the most common way to track in the NASDAQ 100 is through Invesco QQQ (NASDAQ: QQQ), the $268 billion ETF. Although QQ was launched in 1999, the NASDAQ 100 was first tracked in 1985.

The NASDAQ Composite is 14 years older than the NASDAQ 100 and has experienced its fair share of volatility, from the growth-oriented 1980s to the Dot-Com Bubble of the late 1990s to the tech resurgence of the last decade. Both indexes have traded periods of outperformance since the bursting of the bubble, but the chart below shares how the last 10 years have been dominated by large-cap tech.

The Composite enjoyed a few years of superior performance following the Dot-Com era thanks to the run in finance stocks leading up to the Great Recession. However, the finance-free NASDAQ 100 recovered more quickly in the aftermath as low rates fueled investment in the tech sector. 

Since the end of the Great Recession bear market, the NASDAQ 100 has significantly outperformed the NASDAQ Composite. QQQ is up 1400% since March 2009, compared to 998% for the Composite. Both indexes have outperformed the Dow Jones Industrial Average and S&P 500 since the recovery began. Still, the NASDAQ 100 displays the dominance of big tech over the last decade (and with less volatility than the larger Composite).

Which Index Is Right for Your Investment Strategy?

Investing in the incorrect index can drastically alter your performance. While the NASDAQ 100 has outperformed over the last decade, the future is unwritten, and companies excluded from the NASDAQ 100 may be the big winners in the next decade. Focusing on what you can control and invest based on your goals and beliefs is imperative. Consider these 3 factors when building your portfolio:

 

• Risk Tolerance - Anything NASDAQ-related will be tech-heavy. However, you’ll need to consider the risk profile of each asset. The NASDAQ 100 is less volatile thanks to the absence of small caps, but you may prefer the Composite if you want exposure to smaller firms.
• Asset Allocation - The entrance to the NASDAQ 100 has a strict bouncer: only the 100 largest companies and finance firms aren’t allowed. The NASDAQ Composite has much looser rules, allowing companies of all sectors and sizes. Depending on which sectors you want to limit or increase exposure to, you’ll likely have a distinct preference for 1 of these 2 indexes.
• Timeframe - Finally, time in the market likely matters more for returns than any allocation strategy. If you’re investing for a short-term goal, the volatility of the NASDAQ Composite might make you uneasy, whereas a long-term investor can stomach the ups and downs for broader exposure. Timeline and risk tolerance are linked, so consult an advisor to ensure your portfolio matches your objectives.

Conclusion

The NASDAQ 100 and NASDAQ Composite will always share some similarities, but the differences are distinct enough that your investment strategy will likely prefer one to the other. The NASDAQ 100 is a more centralized group of the top tech firms, while the Composite is broad, diverse and volatile. Make sure you understand the types of companies you’re getting exposure to through each index before investing.

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