Last year, the difference between the Nasdaq-100 index and other large-cap indexes was made quite clear because the NDX outperformed the S&P 500 by 31.3%. But, again, this was driven by stocks like AMZN, AAPL, TSLA, NFLX, and MRNA, the exclusion of financials, and the under-weighting to energy and materials stocks.

Today, we dig deeper into what makes the Nasdaq-100 unique and appear at what happens when new tickers are added to the index.

The Nasdaq-100 differs greatly from the S&P 500

Although both the S&P 500 and the Nasdaq-100 are market-cap-weighted U.S. large-cap indexes, our analysis shows that they need been consistently quite different regarding the businesses included.

The Nasdaq-100 is more concentrated, representing the highest 100 Nasdaq listings instead of the highest 500 U.S. listings decided by a committee. All the major companies within Nasdaq-100 are included within the S&P 500 index, like Apple, Microsoft, Amazon, Alphabet, Facebook, and (now) Tesla. Around 80% of the businesses within Nasdaq-100 are within the S&P 500 (Chart 1, note that dual-class shares mean there are over 100 tickers within the Nasdaq 100 index).

Chart 1: Count of NDX constituents from 2002 through 2020

So, what keeps the Nasdaq-100 so different?

There are some rules that the NASDAQ-100 follows that are different from other large-cap indexes. Namely:

• Eligible securities must be Nasdaq listings.

• The index specifically excludes financials.

• Many of the new, growth-oriented U.S. firms choose Nasdaq to list. That has resulted in a unique sector mix, where “new economy” stocks dominate, resulting in technology being the foremost important sector, ranging anywhere between 52% and 64% over the past 19 years.

The S&P 500 isn’t precisely the highest 500 U.S. listings; it is the highest 500 U.S. listings that its committee has determined are eligible. It is a number of its own unique S&P 500 inclusion requirements. One, specifically, requires companies to possess positive earnings over the trailing four quarters, resulting in the delayed entry for several new companies.

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