Investing in Nasdaq: You Can’t Buy It All but Can Come Close
The Nasdaq composite index’s triumphant close above 5,000 Thursday underscores the soaring importance of tech stocks to the new economy and stock market.
But despite the growing awareness of the Nasdaq composite in recent years, there’s still no way to invest directly in the entire index through, say, a low-cost index mutual fund.
There are some alternatives, however.
First, what is the Nasdaq composite? It’s an index tracking the performance of all stocks trading on the electronic Nasdaq Stock Market. Launched in 1971, the benchmark was initially dominated by highly speculative smaller issues.
As technology’s share of the economy grew, though--and as the ranks of individual investors have mushroomed in recent years--Nasdaq also grew in size and influence.
Today, the composite includes about 4,600 stocks that represent a huge swath of the economy. Nasdaq stocks account for $6.5 trillion of the total U.S. stock market’s $14-trillion market capitalization.
Nasdaq stocks range from the biggest stock of all--Microsoft, with a market cap of $520 billion--to U.S. Automotive Manufacturing, a Tappahannock, Va.-based auto parts maker with a market value of $1.7 million. Technically, only about 25% of Nasdaq stocks are categorized as computer, telecom or biotech issues. But those names--from Microsoft to Intel to Qualcomm to Amgen--dominate the index by virtue of their size.
Because so many Nasdaq issues still are very small, it would be difficult for an index fund to buy all those stocks and hold them in proper proportions.
(Index funds track the Wilshire 5,000 total stock market index, but those funds don’t necessarily hold all the stocks in the index. For instance, the Vanguard Total Stock Market Index fund holds about 1,900 of the largest stocks in the index and a “representative” sample of the rest.)
There is one way, however, to capture the general trend of Nasdaq in a single investment.
Recently, a number of new funds and fund-like investments have been created to track the Nasdaq 100, a subset of Nasdaq that reflects the largest 100 nonfinancial stocks in the composite. Those stocks represent roughly 68% of the total market capitalization of the Nasdaq Stock Market.
Because the Nasdaq composite is cap-weighted--meaning the larger a stock is, the more influence it has on the index’s movements--those 100 stocks account for much of the movement of the composite anyway. And since 1990, the Nasdaq 100 has outperformed the Nasdaq composite in seven of 10 years.
If you’re looking to play Nasdaq, here is a quick look at your options--with the caveat that, if big tech stocks collapse en masse, the losses in these securities could be enormous:
* QQQ (year-to-date return: 25.9%). This security, officially the Nasdaq 100 Share but known best by its QQQ ticker symbol, is an index tracking stock that trades on the American Stock Exchange. It represents ownership of all Nasdaq-100 stocks, and can be bought and sold throughout the day through a brokerage account.
Though it’s designed to track the index’s moves, it isn’t perfect: So far this year, QQQ is up even more than the index.
Pure Nasdaq 100 funds:
* Ranson Nasdaq-100 Index Fund (minimum initial investment: $2,500; phone: [877] 627-3272). This new fund, run by a firm in Wichita, Kan., is probably the closest thing to a pure Nasdaq 100 play among mutual funds. The $3-million portfolio simply buys all 100 stocks in the index, in their exact weightings, and holds them.
* Rydex OTC (YTD total return: 23.1%; minimum: $25,000; [800] 820-0888). Older and better-known than the Ranson fund, this $2.9-billion portfolio also tries to mirror the daily gains and losses of the Nasdaq 100. However, it doesn’t necessarily hold all 100 stocks in the index at any given moment: It can use some of its assets to purchase index futures contracts or options on index futures contracts.
* AXP Nasdaq 100 Index Fund (minimum: $2,000; [800] 297-5300). This newly launched $18-million fund tries to mimic the Nasdaq 100 by buying and holding all 100 stocks. However, it is only available through American Express.
“Enhanced” Nasdaq 100 funds:
* Potomac OTC Plus (YTD return: 28.8%; minimum: $10,000; [800] 851-0511). This $251-million fund tries to deliver 125% of the daily movements of the Nasdaq 100. In other words, if the index climbs 1% in a day, the fund’s goal is to gain 1.25%. Of course, if Nasdaq falls 1%, then you’d lose about 1.25%. And if it loses 20%, you’d be down, well, you can do the math.
OTC Plus accomplishes this by using 92% to 95% of its assets to buy all 100 stocks in the index and the remaining 5% to 7% to invest in futures contracts.
* ProFunds UltraOTC (YTD return: 44.5%; minimum: $15,000; [888] 776-3637). This $1.2-billion fund sets its sights a bit higher than Potomac OTC Plus. It seeks to capture 200% of the movement of the Nasdaq 100--with all the accompanying risk.
* Rydex Velocity 100 ([800] 820-0888). Rydex plans to launch this fund later this month. Like ProFunds UltraOTC, this fund will try to capture 200% of the movement in the Nasdaq 100. A twist, though, is that Velocity 100 plans to price twice a day, rather than once, the norm for most funds.
That means if you want to buy or sell shares of the fund based on how it’s moving in the morning, you can.
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The Road to 5,000
Unless you just arrived from another planet, you probably know that technology stocks are the hottest story on Wall Street--and the reason the Nasdaq composite stock index soared past 5,000 on Thursday. But the story of Nasdaq, and technology’s growing dominance in the market, has been building for the last decade.
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Nasdaq’s Widening Lead Over the S&P;
Even before last year’s stunning gain, the Nasdaq composite index had outperformed the blue-chip Standard & Poor’s 500 index in six of the nine years from 1990 to 1998. And between 1990 and 1999, the Nasdaq 100--that market’s biggest stocks--outperformed the Nasdaq composite seven of 10 years. Annual price changes for each index:
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Nasdaq’s Giants: a ‘Who’s Who’ of Tech
The New York Stock Exchange lists plenty of technology stocks, but the four biggest U.S. tech companies, as measured by market capitalization, are Nasdaq-listed shares. Nasdaq’s 10 biggest stocks, ranked by market capitalization:
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Source: Bloomberg News
