US Tech 100 Or S&P 500 - Which Is The Better Index For Investing In The US?

Investments in US equity markets are typically benchmarked against either the Nasdaq 100 i.e. US Tech 100 or the S&P 500 index.

23:02 06 February 2023

Investments in US equity markets are typically benchmarked against either the Nasdaq 100 i.e. US Tech 100 or the S&P 500 index. 

S&P 500 and Nasdaq 100 have similar holdings, but they differ regarding the number of companies, weight, and sector allocation. Over time, both indices have done other things. You should know how these indices are constructed if you're considering investing.

Here's what you need to know about Nasdaq 100 i.e. US Tech 100 and S&P 500 index funds and how their performance and portfolios differ.

What is the S&P 500 Index?

Founded in 1957, the S&P 500 index tracks stocks of the 500 biggest companies in the US. These companies account for over 80% of the market capitalization of US companies, so the index shows how the equity markets are doing.

Indexes are weighted by market capitalization, and stocks with a high market cap get bigger. Market capitalization is calculated by multiplying shares on the stock exchange by price.

It's not just about the market cap when you pick stocks; you also need market availability, earnings growth, and trading volumes (the price multiplied by the number of shares traded). It's also aligned with the market cap of the listed companies, so no sector is disproportionately high.

Apple and Microsoft are among the top holdings, but they make up less than 30% of the portfolio. The top three sectors account for around 53% of the index portfolio, which is lower than the Nasdaq 100.

Almost 500 stocks make up the index. Information technology, energy, materials, industrials, consumer discretionary, consumer staples, health care, finance, communication services, real estate, and utilities are all there. There are 500 stocks on the index, so it's not heavily skewed toward any company or sector.

What Is The Nasdaq 100 Index?

The Nasdaq 100 represents the 100 largest non-financial companies listed since 1985 on the Nasdaq Stock Exchange.

The Nasdaq 100, for example, is dominated by big tech companies like Apple, Google, Microsoft, Tesla, etc. Because financial giants aren't on it, these companies overlook technology and innovation.

It's tech-heavy, so Facebook, Apple, Amazon, Netflix, Google, and Alphabet are also Nasdaq 100 stocks. Over half of the index's holdings are tech companies.

Nasdaq 100, generally considered a tech index, also includes Pepsi and Starbucks, although their allocations are relatively low.

S&P 500 Index Vs. Nasdaq 100 - Performance

Nasdaq 100 outperforms the S&P 500 in terms of returns. Nasdaq has returned 16% CAGR over the last 15 years, while the S&P 500 has returned 8%.

The S&P 500 returned around 5% during these 15 years, but the Nasdaq 100 returned around 9%. Over the past 10 years, Nasdaq 100 would have yielded a maximum return of 21%, while S&P 500 would have yielded a full return of 14%.

Most investors, especially those interested in downside protection, might need to realize that most of the Nasdaq 100's returns come from a few stocks.

It gets hit harder when there's turmoil in tech since technology stocks, including FAANG stocks, dominate the Nasdaq 100. When the dot-com bubble burst in 2002, the Nasdaq 100 fell 38%, while the S&P 500 fell 23%.

Therefore, Nasdaq 100's returns will be more volatile than S&P 500's. Even in the 2008 correction, Nasdaq 100's falls were 42%, while S&P 500's were restricted to 38%.

So which is better - S&P 100 or Nasdaq 100?

The Nasdaq 100 has outperformed the S&P 500 index in the long term despite experiencing higher corrections than the index. The Nasdaq 100, however, is more of a thematic index because it's all about technology. 

FAANG stocks, which comprise most of the Nasdaq 100 portfolio, have already rallied a lot, so they may have trouble continuing that run.

This makes the Nasdaq 100 riskier than the S&P 500, representing a broader range of US companies.

The S&P 500 is a good choice if you want a more diversified basket of stocks. Those comfortable with the slightly higher risk associated with Nasdaq 100 funds may consider the Nasdaq 100 fund.

Invest in an index that suits your risk and return profile.