Everybody calls the Nasdaq-100 a tech index. It mostly is, with around 60% in technology and Nvidia, Microsoft and Apple dominating the top. But here’s the thing; the index has no tech requirement at all. It is simply the 100 largest companies listed on the Nasdaq exchange, with one exclusion – no financials. That’s it. That’s the whole methodology.
The tech weighting is an accident of history. Nasdaq launched in 1971 as an electronic exchange, listing was cheaper and the young technology companies went there while the old economy stayed on the NYSE. So alongside the tech giants holders of the index (via an ETF) also own Costco and PepsiCo neither of which is remotely tech. An index defined by what it excludes (banks) rather than what it includes is an odd thing to anchor a portfolio to. But it has worked spectacularly for investors.
Nasdaq 100
Now it gets interesting. SpaceX lists on Friday at a valuation of +US$1.75trillion, and thanks to Nasdaq’s new Fast Entry rule it will be in the Nasdaq-100 within 15 trading days, at roughly 0.7% of the index on day one. I’ve written before about why bending the index rules for one company is a problem. But maybe you like yourself some SpaceX? Then a Nasdaq-100 ETF is the simplest way to get exposure without buying the stock directly.
In the US the default is Invesco’s QQQ, one of the biggest and most liquid ETFs in the world. The fee dropped to 0.18% in December when it converted from a unit investment trust into a standard ETF. But for most of us the better buy is its sibling QQQM. Same index from the same issuer, at 0.15%. QQQ’s massive liquidity matters if you’re trading; long-term holders should simply take the cheaper one.
Locally we have the Satrix Nasdaq 100 ETF (STXNDQ) on the JSE. The TER of 0.46% is chunkier, but you’re buying in rands with no offshore admin and, importantly, you can hold it in your tax-free account. Over a couple of decades that tax saving beats the fee difference comfortably.
So decide first whether you want what the index actually is; tech-heavy by accident with no banks, and a rocket company arriving by month end. If you do, it’s QQQM offshore or STXNDQ in the tax-free account.
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ETF blog
At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.
