Nasdaq 100 vs S&P 500: Which is More Effective for Investing

Investing in the share market is a great way to diversify your portfolio and mitigate the risk of your other investments. In fact, with advancements and new permission, you can now invest in the US stock market too. 

 

At present, there are two US stock market indices that a majority of investors rely on. These indices are the Nasdaq 100 and S&P 500. As a result, Nasdaq 100 vs S&P 500 is a hot topic for investors.

 

To learn the difference between Nasdaq 100 and S&P 500 and how to choose between these indices, read on.

With market cap weighting, Nasdaq 100 is one of the most common and widely relied on US stock market indices. The index, however, represents stocks of companies majorly having operations in the technology sector. 

 

The Nasdaq 100 index is constructed with 100 companies in different sectors. Common sub-sectors of the index are software, biotech, and more. The index has companies of all sizes, including the one outside of the US.

 

It is important to note that for companies involved in the technology sector, the index also represents speculative companies. As such, the performance of the index is a representation of the companies and the attitude of investors towards speculative stocks. 

 

Top companies listed in the index include Netflix, Facebook (Meta), Apple, and Microsoft.

Representing the top 500 companies in America, S&P (Standard and Poor’s) 500 index is one of the most comprehensive and accurate overviews of the US stock market. The index has market-cap weighting, and the companies listed are in numerous sectors.  

 

Apart from the market cap, the other factors considered in the construction of the index include financial viability, liquidity, asset classification, public float, and trading history. With the number of companies listed, the S&P 500 index represents around 80% of the US stock market. 

 

The top sectors covered under the index include technology, healthcare, consumer discretionary, financial, and communication services. The top companies listed in the S&P 500 index are Apple, Amazon, Berkshire Hathaway Inc., Tesla Inc., and JP Morgan Chase & Co.

Listed below are some of the key points of difference in Nasdaq 100 vs S&P 500:

• Number of Companies Covered

As the name suggests, the Nasdaq 100 index is constructed with 100 companies. However, the companies are non-financial, making the index one of the largest non-financial indices in the market.

Top companies include Apple, Alphabet, Amazon, Microsoft, and Tesla.

Similar to Nasdaq 100, the number of companies under the S&P 500 is in the name, i.e., 500. However, this index also includes financial companies. Moreover, given the number of companies in the S&P 500, the index represents over 80% of the US stock market.

Consequently, this makes the index one of the most comprehensive and accurate representations of the stock market.

• Sectors Covered

As mentioned above, the Nasdaq 100 index mainly has weighting from companies operating in the technology sector. In fact, the technology sector accounts for close to 60% of the index, resulting in it also being known as the tech index.

Other sectors include healthcare, consumer goods, consumer services, and industrial.

The S&P 500 index has companies from numerous sectors, including finance, unlike the Nasdaq 100. The top sectors covered in the index include tech, financial, healthcare, communication services and consumer discretionary.

• Representation of the US Stock Market

Given the number of companies and sectors under the S&P 500 index, the index represents over 80% of the US stock market. This subsequently makes it one of the most preferred indexes as it gives a comprehensive performance overview of the stock market.

 

On the other hand, the Nasdaq 100 index has a limited number of companies and sectors. This makes the representation under this index comparatively less than that of the S&P 500. However, despite this, the index is widely relied on due to its historical performance.

• Concentration Risk

When you look at the S&P 500 top 50 companies vs Nasdaq 100 top companies, one difference is that the Nasdaq mainly has companies from one sector, whereas S&P 500 does not. As such, Nasdaq 100 is comparatively more concentrated than the S&P 500. 

 

On the other hand, S&P 500 index includes companies from various sectors. As such, it has better diversification in terms of both the companies and the sectors. Given this, the concentration risk is higher in Nasdaq 100 than in that of the S&P 500.

 

The choice between S&P 500 and Nasdaq 100 comes down to the investing strategy. In most cases, investors look at the returns and decide accordingly. While this can work, securing long-term gains will require proper planning. 

 

S&P 500 vs Nasdaq 100 returns differ because their weighting and construction method varies. Carefully consider along with the point of differences to understand which US stock market index best suits your investment goals.