Understanding global markets can assist in diversifying portfolios and tapping into growth opportunities. The Nasdaq 100 Index, a collection of some of the largest and most dynamic companies in the U.S., is a popular choice.

In this article, we’ll dive into what the Nasdaq 100 is, explore the iconic companies that make up the index, and discuss how Australians can invest in it. We'll also consider the pros and cons of including this index in your long-term investment strategy. No matter the stage of your investing journey, understanding the Nasdaq 100 could help broaden your investment horizons. Keep reading to discover how.

What is the Nasdaq 100 index?

The Nasdaq 100 index is a basket of the 100 largest, most actively traded U.S. companies listed on the Nasdaq Stock Exchange . It features companies from sectors like technology, telecommunications, and biotechnology, plus consumer services and other industries.

History and background

Introduced in 1985, the Nasdaq 100 reflects the performance of modern, high-growth industries. It's also often used as a barometer for the health of the technology sector. Unlike the broader Nasdaq Composite Index, the Nasdaq 100 excludes financial companies, focusing instead on tech and innovation.

Process and selection criteria

The process for selecting companies to include in the Nasdaq 100 index involves several criteria. These criteria aims to ensure the index reflects the performance of large, non-financial companies listed on the Nasdaq Stock Exchange. Here's how it works:

1. Market capitalisation : Companies must have a high market capitalisation, making them among the largest on the Nasdaq. This is so the index reflects significant players whose performance can influence market trends.
2. Liquidity : Companies included in the Nasdaq 100 must have high liquidity. This means their stocks are traded frequently and in large volumes, allowing easier buying and selling without significant price impacts.
3. Listing requirements : A company must also be listed exclusively on the Nasdaq Stock Exchange. This focus helps maintain the unique identity of the Nasdaq 100 as a benchmark for tech and innovation-centric companies.
4. Trading volume : A company must have a robust average daily trading volume. This is to ensure the stocks are actively traded, reflecting ongoing investor interest and confidence.
5. Review process : The index is reviewed quarterly by a committee. During these reviews, companies that no longer meet the criteria are removed. New companies that meet the criteria are then added. This regular reassessment helps keep the index current and representative of the top non-financial sectors.

The careful selection process ensures that the Nasdaq 100 remains a reliable and dynamic measure of the most influential sectors in the U.S. economy. For investors looking to tap into these sectors, the Nasdaq 100 offers a clear view of America's most pioneering companies.

What is the Nasdaq 100 index used for?

The Nasdaq 100 index is a popular instrument in the investing world, serving multiple purposes that can benefit different stakeholders. Let's look at some of the ways it's used.

Investment benchmark

Investors use it to understand the performance of the largest and most innovative tech and biotech companies in the U.S.

By comparing their portfolio against the Nasdaq 100, investors can evaluate how well they’re capturing growth in these sectors.

Guide for trading and analysis

Investors and analysts use the Nasdaq 100 to understand market trends within the technology and biotech industries. Its movements offer insights into the broader health and trajectory of these high-growth sectors.

Basis for financial products

The index underpins a range of investment products, including exchange-traded funds (ETFs) and mutual funds. These products allow individual and institutional investors to invest in a segment of the market traditionally known for innovation and rapid growth.

Indicator of economic trends

Investors often see the Nasdaq 100 as a forward indicator of broader technological and economic shifts. Movements in the index can sometimes signal changes in investor sentiment towards technology and innovation sectors.

The importance of the Nasdaq 100 lies in its ability to reflect the performance and economic impact of the U.S.'s largest non-financial companies. It provides a focused view for those invested in or following the tech and biotech landscapes. It doesn't, however, account for the whole U.S. economy, which other indexes may be better suited for.

How does the Nasdaq 100 index differ from other U.S. indexes, like the Dow Jones or the S&P 500?

When exploring major U.S. stock indexes, each serves as a unique mirror reflecting distinct aspects of the market. The Nasdaq 100, renowned for its strong tech inclination, contrasts sharply with its peers. Let’s break down these differences:

Feature	Nasdaq 100	Dow Jones Industrial Average	S&P 500
Sector focus	Technology and biotech dominant.	Broad, includes all sectors.	Broad, includes all sectors.
Financial companies	Excludes financial sectors.	Includes financial sectors.	Includes financial sectors.
Weighting method	Market capitalisation – larger companies have a bigger impact on the index’s performance .	Price-weighted – companies with higher stock prices have more influence, regardless of their actual size .	Market capitalisation – larger companies have a bigger impact on the index’s performance .

As mentioned, the Nasdaq 100 is heavily skewed towards technology and biotech sectors. Meanwhile, the Dow and S&P 500 provide a broader overview of the US economy’s health across various industries. It's valuable to understand how these indexes differ from one another, especially since the Nasdaq 100 is less diversified than its other counterparts. This is, as we said, because it focuses only on 100 companies in a specific sector. Understanding these differences and similarities can help investors make better financial decisions, taking into consideration their own risk tolerance and investing timeframe, appetite and interest.

And how do U.S. indexes differ from Australian indexes?

Comparing U.S. and Australian stock indexes uncovers differences shaped by economic structure and market dynamics. U.S. indexes differ from Australian indexes in several key ways:

• Market size and global impact : U.S. indexes like the Nasdaq 100, S&P 500, and Dow Jones represent some of the largest and most globally influential companies. Australian indexes, such as the Australian Securities Exchange 200 (ASX 200) , cover a smaller and more regionally focused market.
• Sector composition : U.S. indexes generally have a more diverse sector representation, with a strong presence in the technology and biotech sectors. Australian indexes tend to be more heavily weighted towards companies in sectors like mining, banking, and healthcare. This reflects the Australian economy's composition.
• International exposure : Companies listed on U.S. indexes often have a larger international market presence compared to those on Australian indexes, which are more domestically focused.

When considering investments in either market, it's important to understand these differences and associated investment opportunities and risks. Consider how they align with your investment goals, risk tolerance, and overall portfolio strategy.

What are some of the most common companies featured in the Nasdaq 100 index?

The composition of the Nasdaq 100 index changes periodically as companies meet or fail to meet the inclusion criteria. However, some companies have been long-standing due to their size, stability, and impact on the tech and biotech sectors. Here are 10 of the most well-known and enduring companies included in the index:

1. Apple Inc. (AAPL) : A leader in consumer electronics, software, and online services, Apple is known for its innovation in products like the iPhone, iPad, and Mac computers.
2. Microsoft Corporation (MSFT) : Specialising in software, services, devices, and solutions, Microsoft is best known for its Windows operating systems and Office productivity suite.
3. Amazon.com Inc. (AMZN) : Originally a book retailer, Amazon has grown into a massive e-commerce platform and cloud computing leader through Amazon Web Services.
4. Google LLC (GOOGL) : Google dominates the internet search market and offers a vast array of services including online advertising technologies, search engine, cloud computing, software, and hardware.
5. Facebook, Inc. (META, formerly FB) : Facebook is a leader in social media, providing platforms and products like Facebook, Instagram, and WhatsApp that connect billions globally.
6. Intel Corporation (INTC) : As a cornerstone in semiconductor manufacturing, Intel provides processors for computer system manufacturers such as Apple, Lenovo, HP, and Dell.
7. Cisco Systems, Inc. (CSCO) : Cisco designs and sells a broad range of technologies that have powered the internet since 1984. This includes networking hardware, software, and telecommunications equipment.
8. Comcast Corporation (CMCSA) : A global media and technology company with two primary businesses: Comcast Cable and NBCUniversal.
9. PepsiCo, Inc. (PEP) : A global food and beverage leader with a product portfolio including 22 brands that generate more than $1 billion each in annual retail sales.
10. Tesla, Inc. (TSLA) : Tesla is at the forefront of electric vehicles, energy storage, and solar panel manufacturing.

These companies reflect the dynamic nature of the Nasdaq 100 and its bias towards high-tech innovation. Each plays a critical role in their respective fields and contributes to the trends that shape the global economy.

How can I invest in the Nasdaq 100 from Australia?

Investing in the Nasdaq 100 from Australia can be straightforward and accessible, even if you're new to investing in international markets. Here are a few options:

• Exchange-traded funds (ETFs): One of the simplest ways to invest in the Nasdaq 100 is through ETFs that track the index. These funds are traded on the ASX just like stocks. For example, BetaShares NASDAQ 100 ETF (NDQ) allows you to gain exposure to the index without the need to buy individual stocks.
• Managed funds: Another option is to invest in managed funds that target the Nasdaq 100, available through financial advisers or investment platforms. They pool money from many investors to purchase a portfolio of assets.
• Online investing platforms: You can also use online investing platforms, like Pearler , that offer access to U.S. stocks and ETFs. These platforms often provide the opportunity to invest in the Nasdaq 100 through various financial instruments. Be aware of potential fees and the impact of exchange rates when moving money between currencies.

Before investing in the Nasdaq, consider that investing in U.S. securities involves currency risk. The value of your investment may be affected by fluctuations in the AUD/USD exchange rate. Also be mindful of the Australian tax implications of earning foreign income through investments in the Nasdaq 100.

These options allow you to gain exposure to some of the largest technology and innovation-driven companies in the U.S. If it aligns with your preferences, investing in the Nasdaq 100 can be a simple way to diversify your portfolio across geographic boundaries and sectors.

Should I invest in the Nasdaq 100?

Deciding whether to invest in the Nasdaq 100 depends on several factors, including your investment goals and risk tolerance. Here are the pros and cons to weigh up to help you decide:

Pros	Cons
Growth potential : The Nasdaq 100 includes many high-growth companies, focused on the technology and biotech sectors. These companies have historically provided strong returns. However, past performance isn't always a reliable indicator of future performance. Innovation exposure : Investing in this index allows you to benefit from exposure to innovative companies and emerging technologies.	Volatility : The heavy concentration in tech and biotech can lead to higher volatility compared to more diversified indexes. This can mean more dramatic ups and downs in the value of your investment. Market sensitivity : These sectors can be highly sensitive to market changes and economic conditions, potentially leading to significant fluctuations.

Investing in the Nasdaq 100 can be part of a diversified investment strategy that includes a mix of asset classes and geographic exposure to mitigate risk. This index may be more suitable for investors with a longer investment horizon who can weather short-term fluctuations for potential long-term gains.

Ultimately, whether the Nasdaq 100 is right for you will depend on your goals, timeline, and risk profile. The index represents an opportunity to engage with some of the most influential and innovative companies in the U.S. market. It offers significant growth potential, especially in the tech sector. But it also carries its own risks due to its sector concentration and market volatility. For long-term investors, incorporating the Nasdaq 100 into a diversified portfolio could potentially provide valuable exposure to global innovation.

Before diving in, consider meeting with a financial adviser to tailor an investment approach that fits your situation.