THE UNBEATABLE INDEX - THE NASDAQ-100

The Best Index Fund that Nobody Knows About

SUMMARY:

Major Market Index funds are the best option for all investors.

Most people stop at the S&P 500 and search no further.

The Nasdaq and the Nasdaq-100 produce better results than the S&P 500, but very few people know this.

Combining Nasdaq index funds with the Beyond Buy & Hold system produces incredible results.

We already discussed the reasons why you shouldn’t own individual stocks or even mutual funds for that matter. NO stock pickers can beat the returns of the S&P 500 over long periods of time – ten years or more. Large cap US index funds (like the S&P) are the way to go. They beat small cap and mid cap funds over the long run. They beat international funds. They beat commodities. They beat bonds. Index fund owners don’t need to do any research. They don’t need to track industry trends. Investing in index funds is very simple and simpler is better than complex when it comes to investing. But which large cap index fund or funds should you own?

THE S&P 500

Index funds which track the S&P 500 index should be at the top of your list. The S&P 500 is the benchmark index that all equity fund managers and investment professionals use to measure their results. You should too. This index represents the 500 biggest and best companies in the world. Specifically, the S&P 500 contains the largest 500 companies that trade on US stock exchanges. This index is highly diversified across companies and industries. These companies’ performance reflects what is going on in the US and global economies. Over long periods of time, the S&P 500 has returned between 7% and 8% per year before dividends. Currently, the S&P 500 has a dividend payout rate of 1.8% per year. So simply owning an S&P 500 index fund will return you around 9% to 10% per year with dividends reinvested. You will not be able to beat that return by investing in your own stock picks or by investing in the stock picks of highly paid money managers via mutual funds. As far as investing in equities goes, the S&P 500 is very safe because of its diversified holdings and because of the size and strength of these companies. The value of all the S&P 500 companies represents about 70% of the value of the entire stock market. It is not immune from bear market crashes, but it will always rebound from bear market crashes and eventually reach higher price levels. For many investors, they should simple stop right here and invest only in the S&P 500.

The ticker symbols of the top index funds that track the S&P 500 are VOO, IVV and SPY. VOO and IVV have lower fees than SPY. Not all these ticker symbols are available on every brokerage platform, but at least one of them is traded on all the major trading platforms – Schwab, Fidelity, TD Ameritrade, etc.

THE NASDAQ

Investors who are looking for higher returns from a large cap index fund will want to consider investing in the Nasdaq. The two biggest stock exchanges in the US are the New York Stock Exchange and the Nasdaq. Companies that meet their financial requirements can trade their stock on either exchange. The Nasdaq composite index contains the stocks of the roughly 2,500 companies that trade on the Nasdaq exchange. While most people think of the Nasdaq as a large cap index, 30% of the Nasdaq is made up of mid cap and small cap companies. The Nasdaq is mostly large cap but not purely large cap. The main difference between the Nasdaq and the S&P 500 is that the Nasdaq contains a higher percentage of technology companies. Just over 50% of the companies that trade on the Nasdaq are technology companies. Tech companies only make up 28% of the S&P 500. Because the Nasdaq contains more exposure to smaller companies and technology companies, you get more growth in the Nasdaq vs. the S&P 500. But you also get more volatility. The Nasdaq beats the S&P 500 by about 2% per year over the long term. You can expect the Nasdaq index to grow by 9% to 10% per year compared to 7% to 8% for the S&P 500. The S&P 500 pays out dividends at a slightly higher rate, however. The current dividend ratio for the S&P is 1.5% compared to 0.8% for the Nasdaq. Including dividends, you can expect to earn about 1.5% more per year in the Nasdaq versus the S&P 500. That may not sound like much, but earning and additional 1.5% per year would generate 50% more total dollars over 30 years.

The chart below compares the performance of the S&P 500 to the Nasdaq Composite between 1986 and 2022. An investment in the Nasdaq would have generated about twice the amount of money at the end of 2022 versus the same investment in the S&P 500. But the gains were not consistent. The Nasdaq surged ahead in the late 1990’s during the dot-com bubble, but the Nasdaq gave back all those gains in the early 2000’s. From 2009 through the end of 2021, the Nasdaq significantly outperformed the S&P 500.

The greater volatility in the Nasdaq means that price peaks are higher and price valleys are lower when compared to the S&P 500. The Nasdaq tends to drop more in bear markets and tends to climb higher in bull markets. In years where the S&P 500 is declining in value, the S&P index drops by an average of 12% per year. In those same years when the S&P is declining by 12% per year, the Nasdaq is declining by 18% per year. In years where the S&P 500 is increasing in value, the S&P index grows by an average of 17% per year. In those same years when the S&P is increasing by 17% per year, the Nasdaq is gaining 24% per year. Since the S&P only loses money 27% of the time and increases in value 73% of the time, the math works in the Nasdaq’s favor. When it lags (27% of the time), it falls short by 6% per year. When it beats the S&P (73% of the time), it wins by 7% per year. The volatility results in peaks that are 7% higher and valleys that are 6% lower. Since most people are uncomfortable with the volatility of the S&P 500 (bear markets), they tend to stay away from the Nasdaq because it is even more volatile. The extra 2% per year in additional returns is not worth the added volatility for them. In the long run, though, long-term Nasdaq investors will end up with more money vs. S&P 500 investors.

THE NASDAQ-100

The Nasdaq 100 has a similar profile to the Nasdaq Composite. It represents only the biggest 100 companies that trade on the Nasdaq. The Nasdaq-100 contains an even higher percentage of technology companies than the Nasdaq Composite and it does not contain any financial companies. The returns for the Nasdaq-100 are even higher than the Nasdaq composite and it is not any more volatile than the Nasdaq composite on the downside. While the Nasdaq composite beats the S&P 500 by about 2% per year, the Nasdaq-100 beats the S&P 500 by about 4% to 5% per year. That overperformance is very significant. Earning an additional 4.5% per year compared to the S&P 500 would generate 240% more total dollars over 30 years. In years where the S&P 500 is declining in value, the S&P index drops by an average of 12% per year. In those same years when the S&P is declining by 12% per year, the Nasdaq-100 is declining by 17% per year. In years where the S&P 500 is increasing in value, the S&P index grows by an average of 17% per year. In those same years when the S&P is increasing by 17% per year, the Nasdaq-100 is gaining 29% per year. Since the S&P only loses money 27% of the time and increases in value 73% of the time, the math works in the Nasdaq 100’s favor. When it lags (27% of the time), it falls short by 5% per year. When it beats the S&P (73% of the time), it wins by 12% per year. The volatility results in peaks that are 12% higher and valleys that are 5% lower. As with the Nasdaq, people tend to avoid the Nasdaq-100 due to the added volatility. But for long-term investors, people miss out on a lot of investment gains by staying away from the Nasdaq-100.

In the next chart, we add in the Nasdaq-100 to the comparison. The Nasdaq-100 stayed ahead of both indices in the 2000’s and had explosive growth after 2009. Surprisingly, most investors are not aware of the strong performance of the Nasdaq-100 index. Savvy investors are well aware of the advantages of investing in the Nasdaq-100.

There are not as many options for Nasdaq index funds. We use the ticker symbol ONEQ for the Nasdaq composite and the ticker symbol QQQ for the Nasdaq-100.

The following chart compares the value of a $10,000 starting investment at the beginning of 1986 in the S&P 500, the Nasdaq Composite, and the Nasdaq-100. You can see how significantly the Nasdaq and the Nasdaq-100 outperform the S&P 500. The Nasdaq-100 investment produced $845,000 compared to $182,000 for the S&P 500 – almost five times more money or an extra $663,000. Amazing!

	​S&P 500	​Nasdaq	​Nasdaq-100
Beginning Investment	$10,000	$10,000	$10,000
Ending Investment	$182,000	$319,000	$845,000

THE NASDAQ AND BEYOND BUY & HOLD

Since our Beyond Buy & Hold avoids most of the pain associated with bear market collapses, we are very comfortable owning Nasdaq index funds. The larger declines in bear markets for the Nasdaq when compared to the S&P 500 creates better opportunities for our system to profit by trading the Nasdaq in those bear markets. Since we go “all in” during bull market cycles, we get to reap the rewards of the higher returns of the Nasdaq and the Nasdaq 100.

Avoid the Nasdaq at your own peril. Combining the Nasdaq-100 with the Beyond Buy & Hold investing system can create incredible results for your portfolio.

Be well,

Phil

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Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.