​

Why Invest in the Nasdaq-100 Index

When it comes to the markets, investors have thousands of ideas to choose from. For example, ETFs were invented in 1990 and became popular in the early 2000s. When compared to mutual funds, ETFs have more liquidity and lower fees for more exposure. This is why so much money has been invested in the S&P 500. It’s the most effective way to be invested in the market.

Now I’m a man of the market and have been studying these trends for years. First it was the Dow Jones index, which was invented on May 26, 1896, by Charles Dow and Edward Jones. They were the co-founders of the Dow Jones & Company and The Wall Street Journal. You may have heard of them.

The Dow Jones focused on industrial stocks, which were the most popular at the time. General Electric is the most notable name that was trading in the index until 2018. 122 years is impressive for any stock.

These indices provide investors with two elements: economic indicators and benchmarks. Investors use an index to track the health of a market overtime. You’ve probably seen the daily ticker tapes that show the Dow Jones, S&P 500 and Nasdaq indices. Investors use these indices as benchmarks for their own portfolios as well.

Benchmarks are helpful in investing. They give you a sense of how your portfolio is performing vs the market. It became a popular tool for money managers. However, these benchmarks have benefitted investors more than money managers overtime. Let me explain why in the next section.

The Real Cost of Underperformance

In investing, there are two sides of every coin. There is a management fee and a performance fee. Whether you manage your money or someone else, there is a cost associated with it. The same goes for performance, how you invest determines how you perform.

Now mutual funds, a once unique investment structure, have become notorious for their high fees. Below are two graphs from Investopedia showing the impact of different fee structures.

The first graph below shows investors the impact on an investor’s $100,000 portfolio over 30 years. The difference between a 0.15% fee structure vs a 1.00% fee structure is massive.

This second table shows investors another data point worth analyzing. Not all asset classes are weighted equally. If you invest in growth equity or value, the fees associated with those specialities are much higher. As opposed to the Index equity, which has the lowest fee structure, around 0.05%.

For the average investor, buying the index makes sense. However, if you want to outperform the index, you need to look for better areas in the market. Now I have a personal bias so I focus on technology ideas. They have high net margins and high growth profiles. The combination leads to very high returns. Which is why I chose the Nasdaq-100 as my benchmark.

Why Focus on Tech Stocks

The Nasdaq-100 is a concentrated index, focused on the largest non-financial companies listed on the Nasdaq exchange. It has a heavy concentration on large cap technology stocks.

Now you might be asking, why the Nasdaq-100 vs the Nasdaq Composite? If you look at the comparison chart below, you will notice that the Composite outperforms every other index. The reason is because it has 2,500 companies and 50% exposure to technology.

The Composite has many more smaller cap companies. It is a diversified structure but more volatility built-in because of the smaller cap exposure. This is useful to know but not the point of my exercise.

Instead I want to know how the best companies are performing in the index. One of the best pieces of advice a college professor gave me was the following:

“Vijar, instead of blindly buying the S&P 500 Index because of its low fee and average market rate, focus on the best 50 companies in the Index. You have the knowledge of how to read financial statements. You know what great companies look like. If you stop investing in losers, you will make higher returns. It’s as simple as that.”

On the surface, this sounds like a brilliant strategy. Find the top 50 companies and only invest in them. Similar to how the Dow Jones was primarily focused on Industrial stocks early on. Instead investors get to choose their sector exposure. I choose technology.

The Nasdaq-100 Index

Unlike the typical money manager, I use the Index to study operational performance. Not only investment returns. Because of my technology background, my investment knowledge compounds when studying different hardware and software providers.

For example, the index is made up of companies like Apple and Google. Very popular companies that many investors own. But the index also owns hardware companies like Cisco, Marvell and T-mobile. These are lesser known stocks and require more knowledge when investing. I am building that knowledge base.

For example, ARM Holdings and Booking.com are in the Nasdaq-100 today. If you’re not familiar, ARM Holdings manufactures semiconductor chips for everyday devices like the iPhone up until 2021. Booking.com is a company where consumers purchase travel packages. For more insight, look at the gross margins of each business. Chances are you have heard of Apple but never thought of ARM or Booking.com.

On the surface, these look like very different businesses. They are. However, if you want to understand the supply chain of technology, start from the chip then go to the consumer. In this particular case, when I’m studying the Nasdaq-100, I am studying the complete supply chain of technology. This is why I use the Nasdaq-100 as the benchmark. It makes me a better investor.

Why Importance of Benchmarking

For me, the Nasdaq-100 is more than just a benchmark for returns; it's a continuous learning opportunity. By focusing on tech leaders, I gain a better understanding of the world of hardware, software, and the evolving needs of consumers. These are the driving forces for advancing technology today.

The index serves as my roadmap. While the broader market has its appeal, the Nasdaq-100's concentrated focus on innovation aligns perfectly with my investment philosophy: to constantly learn, adapt, and invest in the companies shaping tomorrow.