Originally published at: Capturing innovative growth potential through Nasdaq indices – InvestEngine Insights
Investment risks: For complete information on risks, refer to the legal documents. The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested.
If you’re looking for passive exposure to US large-capitalisation stocks, your choice is likely between the S&P 500 and Nasdaq-100. These indices are highly correlated¹, meaning they have historically tended to move in sync with each other, which may not be too surprising given that you’ll currently find 85% of Nasdaq-100 companies also in the S&P 500. However, some important distinctions can make Nasdaq indices compelling alternatives to the broader US large cap market, with more concentrated exposure to growth industries and some of the most innovative companies in the world.
Nasdaq: Home for innovation
One reason why such a high percentage of the Nasdaq-100 index is in these innovative, forward-looking companies is arguably linked to the Nasdaq Stock Market itself, which dates back to 1971 when it was launched as the world’s first fully electronic stock exchange. It’s natural for an innovation-driven company to be drawn to listing its stock with the disruptor to traditional exchanges – and one that is itself committed to innovation.
Once seen almost exclusively as a technology market, Nasdaq has been attracting companies across all sectors, but particularly those in high growth “new economy” industries. Companies in Information Technology, Communication Services, Consumer Discretionary and Health Care comprise 85% of the Nasdaq-100 in terms of their combined market capitalisation, compared to 62% of the S&P 500².
The Nasdaq-100, however, is more than just a technology or even a new economy index. You’ll find companies representing every sector (except Financials, which is excluded from the index), even those that might be considered, dare we say, boring, including the likes of Consumer Staples.
Is there a link between innovation and growth?
Innovation can drive a company’s growth, but tangible results are rarely immediate. It takes time for innovative ideas to materialise in the form of increased sales, profits growth or some other meaningful measurement, and the process can be expensive. We’ve seen plenty of examples of both success and frustration in recent years.
For instance, companies that announced ambitious plans to develop or implement artificial intelligence (AI) technology were initially viewed constructively by the market, evidenced by share price appreciation. You also saw some companies penalised by the market for a lack of spending on AI initiatives.
More recently, however, investors have been more critical in some cases for the unacceptable time it was taking for these expenses to reap rewards. This is why innovation needs to be embedded within a company’s culture, with continual investment (ideally leading to positive outcomes) rather than “dabbling” in innovation and possibly surprising shareholders.
R&D: measuring the commitment to innovation
You can measure a company’s dedication to innovation by looking at how much it spends annually on research & development (R&D).When compared to the S&P 500, companies in the Nasdaq-100 tend to spend more money on R&D, as well as reinvest a greater percentage of their sales via R&D.
As of the end of March 2024, the weighted average annual R&D expenditure of Nasdaq-100 companies, as a percentage of sales, was 11.7% compared to 8.7% for S&P 500 companies. However, if you exclude Nasdaq companies from the S&P 500 index, that percentage of R&D spend reduces to just 1.8%.³
It’s not just a technology theme
Needless to say, many leading technologically oriented companies are driving innovation, ranging from advancements in AI to data analytics to self-driving cars, among many other areas. But non-tech industries represented in the Nasdaq-100 have also invested in R&D to drive growth.
For instance, companies in the food and beverage industry are tapping new technologies across their products’ lifecycles. Recent industry examples include employing drones to monitor the health of cocoa farms, creating plant-based alternatives for dairy cheese, and utilizing 3D printing methods to manufacture fully recyclable squeezy bottles.
Innovation can be patently obvious
Patents across 35 different disruptive technologies are owned by companies within the Nasdaq-100⁴. Some of these themes and technologies might contribute to a company’s bottom line today, while others may be future drivers of earnings growth 5, 10 or even 20 years down the road.
Fifty-eight companies in the Nasdaq-100 (representing 83% of index weight) recently filed patents across one or more of 35 key areas within disruptive technology such as AI, clean energy, or Blockchain.
No matter how much the market environment changes, the desire and need to innovate remains constant. We think companies will continue to lay the groundwork for better products and new services as innovation continues to push us into the future.
Gaining access to Nasdaq indices
Invesco offers the largest range of ETFs in Europe tracking Nasdaq indices. In addition to the flagship Invesco EQQQ Nasdaq-100 UCITS ETF, with its US$11 billion in assets under management⁵, we also offer cost-efficient exposure to other benchmarks providing access to the innovative companies listed on the Nasdaq Stock Market.
If you want to reduce the concentration of the largest companies, you may wish to consider the Invesco Nasdaq-100 Equal Weight UCITS ETF as an alternative weighing approach to traditional market-cap weighting.
The Invesco Nasdaq Next Generation 100 UCITS ETF tracks an index comprised of the next largest 100 companies on the Nasdaq Stock Market, after the Nasdaq-100 names. Many of these cutting-edge companies may be the market leaders of tomorrow.
An investment in these funds is an acquisition of units in a passively managed, index tracking fund rather than in the underlying assets owned by the funds.
Investment risks
For complete information on risks, refer to the legal documents.
The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested.
The funds may be exposed to the risk of the borrower defaulting on its obligation to return the securities at the end of the loan period and of being unable to sell the collateral provided to it if the borrower defaults.
The funds might be concentrated in a specific region or sector or be exposed to a limited number of positions, which might result in greater fluctuations in the value of the funds than for a fund that is more diversified.
The value of equities and equity-related securities can be affected by a number of factors including the activities and results of the issuer and general and regional economic and market conditions. This may result in fluctuations in the value of the funds.
Important information
Data as at 19 September 2024 unless otherwise stated. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Views and opinions are based on current market conditions and are subject to change. For information on our funds and the relevant risks, refer to the Key Information Documents/Key Investor Information Documents (local languages) and Prospectus (English, French, German), and the financial reports, available from www.invesco.eu. A summary of investor rights is available in English from www.invescomanagementcompany.ie. The management company may terminate marketing arrangements. UCITS ETF’s units / shares purchased on the secondary market cannot usually be sold directly back to UCITS ETF. Investors must buy and sell units / shares on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units / shares and may receive less than the current net asset value when selling them. For the full objectives and investment policy please consult the current prospectus.
NASDAQ®, NASDAQ-100 IndexSM, NASDAQ-100 Equal Weighted™ Index and NASDAQ Next Gen 100 Index are trade/service marks of The Nasdaq Stock Market, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by Invesco. The Product(s) have not been passed on by the Corporations as to their legality or suitability. The Product(s) are not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S).
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EMEA4030915/2024
¹ Source: Nasdaq Index Research Team, 93% correlation of daily returns from 31 Dec 2007 to 28 Mar 2024
² Source: Invesco, Bloomberg, as of 18 Sep 2024
³ Source: Nasdaq Global Indexes, FactSet, as of 31 March 2024
⁴ Source: Nasdaq. Patent data as of 30 November 2023. Index data as of 29 November 2023. Most current data available.
⁵ Source: Bloomberg, as of 19 Sep 2024