The Nasdaq-100 and the New Economy

Over the past several decades, the Nasdaq-100 index has greatly evolved and firmly established itself as a premier benchmark for growth and innovation. The index’s companies represent the new economy of the 21st century, and are strongly oriented toward technology and consumer services. While many of the companies in the Nasdaq-100 already directly impacted our daily lives, their impact was magnified during the pandemic, and their importance may continue to grow as many of the ways we work, learn, consume, and travel change over time. The Nasdaq-100 has established itself not just as a core exposure in many investors’ portfolios, but as a market segment that’s also actively traded, with ETFs tracking the Nasdaq-100 being some of the most actively traded funds within the overall ETF universe.

Since the beginning of the new century, the Nasdaq-100 has lived through a range of market environments, including three bear markets, the longest expansion in modern economic history, and a pandemic. Over the past 20 years, the Nasdaq-100 has been more volatile than the S&P 500, but the greater volatility profile has also been accompanied by greater overall returns. When it comes to annual returns, the Nasdaq-100 has beaten the S&P 500 in 13 out of the past 20 calendar years (2000-2020), including 9 of the last 10 (2010-2020).


As we continue to live through the pandemic that began in early 2020, the role of technology in everyday life has grown even more prominent. Whether it’s attending work meetings over Zoom, ordering more packages to our doorsteps from Amazon, or electronically signing for a home purchase through DocuSign, these companies helped provide a “normal” transition to a shifted pattern of life’s regular activities. This helped contribute to the Nasdaq-100’s 49% return in 2020. Of the Nasdaq-100’s top 10 holdings, which account for about half the overall weight of the index, each one of them returned more than 30%.


While the Nasdaq-100 exhibits a number of strong characteristics, investors should also consider potential headwinds. The index may continue to experience volatility, such as the correction and 11% decline from February 12 – March 8 this year. One contributing factor to the pullback has been a rise in Treasury yields this year, and the pace at which they’ve risen at certain points. The increase, which has occurred in response to optimism around the economy’s reopening and the potential for rising inflation, has caused investors to reassess valuations across a range of investments. Relatedly, many investors are carefully listening to Federal Reserve Chairman Jerome Powell for economic comments or shifts in the tone of monetary policy.

Another headwind is the omnipresent concern of increased government enforcement. Aside from the growing influence of Big Tech-skeptical politicians, President Biden made news in March with the selections of Lina Khan and Tim Wu—two Columbia academics with long histories of support for increased antitrust enforcement toward tech giants—for positions in his administration. Khan was nominated to be Commissioner of the Federal Trade Commission, and Wu joined the President’s National Economic Council, with a focus on technology and competition policy. This may be a clear sign of stronger enforcement facing big tech in years ahead.

As investors increasingly gain exposure to the Nasdaq-100 and this dynamic segment of the market, they should also consider investment vehicles available to them to manage risk. Risk management tools include inverse ETFs such as PSQ (-1x daily objective, Nasdaq-100), which can be tactically used to hedge and mitigate the impact of market downturns, or to underweight the Nasdaq-100, for example.




 

Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.

Shares are bought and sold at market price (not NAV), and are not individually redeemed from the fund. Market returns are based on the composite closing price, and do not represent the returns you would receive if you traded shares at other times. The listing date is typically one or more days after the fund inception date. Therefore, NAV is used to calculate market returns prior to the listing date. Brokerage commissions will reduce returns. Index returns are for illustrative purposes only, and do not represent fund performance. Index returns do not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged, and one cannot invest in an index.

Investing involves risk, including the possible loss of principal. Most leveraged and inverse funds seek returns that are a multiple of (e.g., 2x or -2x) the return of a benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, leveraged and inverse fund returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings as frequently as daily. Most leveraged and inverse funds are non-diversified and each entails certain risks, which may include risk associated with the use of derivatives (swap agreements, futures contracts and similar instruments), imperfect benchmark correlation, leverage and market price variance, all of which can increase volatility and decrease performance. Inverse funds should lose money when their benchmarks or indexes rise. Please see their summary and full prospectuses for a more complete description of risks.

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