Why Has the NASDAQ-100 Outperformed the NASDAQ Composite?
Understanding the performance of the NASDAQ-100 and the NASDAQ Composite is critical for market analysts and investors alike. Both indices offer insights into the health and growth potential of companies within the NASDAQ market, but their structures and performance rhythms reveal distinct dynamics.
What is the NASDAQ-100?
The NASDAQ-100 is an index that represents the 100 most highly capitalized stocks in the NASDAQ. Market capitalization, or capitalized value, is defined as the total market value of a company, calculated by multiplying the number of outstanding shares by the current share price. Therefore, the NASDAQ-100 serves as a benchmark for the most successful companies in the NASDAQ market, reflecting the top-performing and well-regarded stocks.
What is the NASDAQ Composite?
The NASDAQ Composite is a broader index that includes all the companies listed on the NASDAQ stock exchange. It comprises over 3,000 stocks, providing a comprehensive view of the NASDAQ market. Unlike the NASDAQ-100, the NASDAQ Composite captures a more diverse range of companies, including those that might be considered less successful or less stable.
Factors Driving the NASDAQ-100 Outperformance
The notable performance of the NASDAQ-100 relative to the NASDAQ Composite can be attributed to several factors:
Higher Quality Companies
Companies included in the NASDAQ-100 are typically more successful and have higher market capitalizations. This means they are more likely to be leaders in their respective industries and have strong financial performance. The inclusion criteria for the NASDAQ-100 ensures that only the most stable and well-regarded companies are represented, contributing to its overall performance.
Proactive Listing Policies
New Initial Public Offerings (IPOs) generate significant interest and media attention, which often leads companies to choose the NASDAQ for listing. Although the New York Stock Exchange (NYSE) also lists many IPOs, the NASDAQ tends to be preferred due to lower listing costs. The NASDAQ is known for its flexibility and cost-effectiveness, making it an attractive option for many companies.
Dynamic Nature of the NASDAQ Composite
The NASDAQ Composite includes a large number of companies across various stages of growth. While it offers a broad view of the market, it also includes a higher proportion of smaller, less stable, or less successful companies. Due to the fluctuating nature of these companies, the NASDAQ Composite can be more volatile and less stable compared to the NASDAQ-100.
Delisting and Market Stability
A key factor in the stability of the NASDAQ Composite is the frequent delisting of underperforming companies. The NASDAQ has a rigorous process for delisting, which involves maintaining a minimum share price. For instance, if a company's share price falls below $1 for an extended period, it risks delisting. Additionally, some companies choose to delist voluntarily due to rising costs associated with maintaining listing status.
The NASDAQ Composite typically remains relatively stable due to the influx of new IPOs and the ongoing listing and delisting process. However, this stability can be misleading if it masks the underlying performance of individual companies within the index.
Conclusion
The outperformance of the NASDAQ-100 over the NASDAQ Composite highlights the importance of focusing on high-quality, stable companies for long-term investment strategies. Understanding the factors that contribute to index performance, including market capitalization, listing policies, and delisting dynamics, can help investors make more informed decisions.