A Second Home for Innovation: The Launch of the Nasdaq Next Generation 100

• By Mark Marex and Ben Jones, Product Development Specialists, Nasdaq Global Information Services

Innovation and growth; two words that have come to define the past, present, and future of the Nasdaq-100® (NDX) Index, one of the world’s preeminent large-cap growth indexes. While the Nasdaq-100 represents today’s large cap, category-defining companies on the forefront of innovation, what companies are the next generation of innovators and game changers? Who will become the next generation of Nasdaq-100 companies?

The Nasdaq Next Generation 100® (NGX) Index is designed to measure the performance of the next generation of Nasdaq-listed non-financial companies; that is, the largest 100 securities outside of the Nasdaq-100 Index. The index deploys the proven methodology behind the time-tested Nasdaq-100 Index, with its emphasis on innovation and growth. The index launched on August 24, 2020.

Methodology

To be eligible for inclusion in the index, a security must meet the existing Nasdaq-100 Index eligibility criteria. The index begins with the universe of all companies, both domestic and foreign, that are listed on the Nasdaq Stock Market (issuer of the security’s primary U.S. listing must exclusively be listed on the Nasdaq Global Select Market or Nasdaq Global Market exchanges). The index then removes all companies classified as Financials from eligibility according to the Industry Classification Benchmark (ICB). The Nasdaq Next Generation 100 Index follows the same annual reconstitution and quarterly rebalancing schedule as the Nasdaq-100 Index.

At each Index Reconstitution, all issuers that meet the applicable security eligibility criteria are ranked by market capitalization, with the issuer having the highest market capitalization getting a rank of 1, the issuer having the second highest market capitalization getting a rank of 2, and so on. The next largest 100 issuers by market capitalization that are not in the Nasdaq-100 Index are included in the index.

The index is a modified market capitalization-weighted index. Initial weights are determined by dividing each Index Security’s market capitalization by the aggregate market capitalization of all Index Securities. The initial index weights are adjusted to meet the following constraint: No Index Security weight may exceed 4%.

Industry and Constituent Allocations

While the Nasdaq Next Generation 100 and the Nasdaq-100 share similar DNA in terms of how they are constructed, they are different with respect to their composition – across industries and of course, constituent cap size. Most notably, the major difference in industry exposure is the allocation to Technology. Yes, both indexes are overweight Technology but the Nasdaq-100 tends to average more than half its weight in Technology, with approximately 56% as of September 30, 2020. On the other hand, the Nasdaq Next Generation 100 allocated roughly 36% to Technology. Another difference is the exposure to Industrials, with the Nasdaq Next Generation 100 at a 17% allocation compared to only 5% in the Nasdaq-100. Health Care is another major differentiator, as the Nasdaq Next Generation 100 recently had nearly triple the exposure to this industry, 20% versus only 7% for the Nasdaq-100.

The difference in industry exposure is a prime example of how the Nasdaq-100 and Nasdaq Next Generation 100 complement each other. The Nasdaq-100 has a much more meaningful overweight towards Technology, while the Nasdaq Next Generation 100 has a larger tilt towards Health Care and Industrials. The below chart illustrates these differences, with the Nasdaq-100 represented by the inner circle and the Nasdaq Next Generation 100 by the outer circle.

The industry allocations of the Nasdaq Next Generation 100 have remained fairly stable over the course of the simulated index history (which dates back to December 18, 2009) in large part due to the predominantly innovative and growth-oriented nature of companies listed on the Nasdaq Stock Market. The overweight towards Technology persisted throughout the backtest and is also consistent with what we find across the Nasdaq-100 and the Nasdaq Composite. The allocation to Consumer Services peaked at nearly 27% in 2012, briefly overtaking Technology as the largest sector allocation, but has since dropped down to less than 16% as of September 30, 2020. Meanwhile, the weighting towards Industrials has increased the most, rising from just under 12% in 2009 to 17%, while Heath Care grew from approximately 16% to just under 20%, with a peak of 27% in 2014. Not surprisingly, Technology’s lowest weights were registered during the years when Consumer Services and Health Care peaked.

When compared to its midcap benchmarks, we find that the industry exposure of the Nasdaq Next Generation 100 Index is more focused than that of the S&P Midcap 400 but shares some similarities to the Russell Mid Cap Growth Index, particularly with the emphasis toward Technology and Healthcare. The Nasdaq Next Generation 100 Index is heaviest in Technology, Healthcare, Industrials, and Consumer Services. The S&P Midcap 400 has its highest weights in Industrials and Financials. It’s important to note that the Nasdaq Next Generation 100 has no allocation toward Financials: this industry accounts for over 20% of the S&P Midcap 400.

The Nasdaq Next Generation 100 utilizes a modified market capitalization weighting scheme with a constraint that no index security weight may exceed 4%. It should come as no surprise that the top ten constituents only account for 21.11% of the index (through September 30, 2020). By comparison, the top five holdings in the Nasdaq-100 account for 45.90% of the index while the top ten amount to 58.18%. In addition, notice how the position sizing is drastically different between the two indexes with the top position in the Nasdaq-100 accounting for 13.42% of the index, while the largest position in the Nasdaq Next Generation 100 is at 2.57%.

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Disclaimer:

Nasdaq® is a registered trademark of Nasdaq, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

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