Why Should We Focus on the Nasdaq-100® Index in the Post-pandemic Era?

This article was first published in ZUU online on June 24, 2022. Click here for the original article in Japanese.

Inflation is accelerating around the world against rising resource and energy prices. Monetary authorities in key countries are shifting from “easing their monetary policy and lowering interest rates” to “tightening monetary policy and raising interest rates” to control inflation, requiring investors to change their investment strategies to align with the post-pandemic era. 

Under these circumstances, a portion of investment funds is now heading toward U.S. stocks, creating a “U.S. stock boom.” However, there is less information available on U.S. stocks than on Japanese ones, and many Japanese investors are still unsure of what to buy. Therefore, we would like to introduce the Nasdaq-100® (or NDX®), which allows investors to invest in U.S. stocks that have high-growth potential and also offers the advantage of index investing. Let us explain the appeal of the Nasdaq-100, which has been attracting investor attention worldwide due to its characteristics and growth potential.

Inflation-proof investment models critical in the post-pandemic era

In Japan, investing in U.S. stocks has increased significantly over the past few years. Their long-term upward trend, the projected continued growth of the U.S. population, and the presence of many of the world’s leading global companies on US exchanges have led to an increased focus on U.S. stocks in Japan too.

Until now, the ratio of cash and deposits amongst Japanese households has been high at around 50%, while the ratio of stocks and investment trusts has remained at around 10% (Source: Bank of Japan, November 1, 2021), reflecting an ultra-conservative trend. Since the burst of the bubble economy in 1991, Japan’s economy has stagnated and entered a period of prolonged deflation. In a deflationary economy, the relative value of money rises, so there is no need to worry about asset value declining if assets were held in cash or savings.

Household Financial Asset Composition

However, we are now about to enter a time of global inflation against rising resource and energy prices. Japan is no exception. If Japan continues to follow a conservative investment strategy of holding most of its assets in cash and savings, the real value of its assets may only decrease due to inflation, which will cause the value of money to diminish. As the world, including Japan, moves into a “post-pandemic” phase, it is important to have a long-term investment model that is able to withstand inflation.

After the collapse of the bubble economy in 1991, Japan’s stock market has been in a slump for what has been called the “lost 30 years”. But since 2012, the market has been in a long-term uptrend, and by 2021, the Nikkei Stock Average reached the 30,000-point mark for the first time in 31 years. However, it has yet to reach its all-time high of 38,957 points, as seen in December 1989.

On the other hand, U.S. stocks have recovered from the shock of numerous crashes, such as Black Monday in 1987, the Lehman Shock in 2008, and the Corona Shock in 2020, and they have continued to reach new all-time highs. In other words, no matter when you bought U.S. stocks in the past, you are currently in a positive position. The “long-term upside potential” is the main reason why U.S. stocks are favored by investors around the world.

Diversification into non-Japanese stocks is essential to mitigate risk

In order to avoid the diminution of assets due to inflation, investors are required to invest in higher risky assets than cash, such as stocks, however, investing in stocks also entails risk. Diversification is an important way to mitigate this risk. There are three types of diversification investment: asset diversification, time diversification and geographic diversification.

The diversification of assets includes not only Japanese stocks but investments in countries other than Japan. This is because a portfolio consisting only of Japanese stocks cannot avoid problems specific to Japan, such as a declining population and sluggish demand. To mitigate such investment risks while at the same time achieving the desired investment returns, it is necessary to diversify into non-Japanese equities.

Nasdaq is attracting attention from investors around the world

So, which markets outside of Japan are promising investment targets? The most promising market would be U.S. equities. One of the reasons for this is the historically high performance of U.S. stocks. 

The Nasdaq Stock Exchange is home to many of the world’s leading technology companies, including the “GAFAM” line-up (Google [Alphabet], Apple, Facebook [now Meta], Amazon.com and Microsoft), which have rapidly grown into mega-corporations in recent years. Nasdaq is widely considered to be the exchange of choice for innovative companies in technology as well as other sectors that are disproportionately driving U.S. economic growth. If you are looking for higher returns, you should consider investing in the stocks listed on the Nasdaq market.

As of year-end 2021, Nasdaq-listed companies accounted for just under one-half of the market capitalization of all U.S. equities. The long-running trends of globalization, digitization, and technology-driven innovation are well-represented by Nasdaq-listed companies and have only accelerated in recent years, solidifying their reputation as a major source of growth.

Let us take a look at various indexes. Outside of Nasdaq, there are other world-renowned indices, such as the Dow Jones Industrial Average and the S&P 500 in the U.S., which also track companies listed on the New York Stock Exchange. Over the past almost decade and a half, the Nasdaq Composite has clearly outperformed the other indices, with a total return of 591% vs. 333% for the S&P 500 and 290% for the Dow Jones (as of December 31, 2021). 

After 2020, real economic activities across the world were paused due to the pandemic, but companies in the IT, digital, and technology sectors grew significantly. As a result, the Nasdaq index probably outperformed the New York Dow, S&P 500, and other indices by a wide margin.

Nasdaq-100 index shows strong price movement despite COVID-19 turmoil

Of particular note is the Nasdaq-100 index, which consists of 100 major stocks listed on Nasdaq.

Whereas the Nasdaq Composite is the broadest option for tracking Nasdaq-listed companies, it is not the most investable. The Nasdaq-100, which tracks 100 of the largest non-financial companies listed on Nasdaq, offers investors the ability to track one of the most liquid index ecosystems in the world, with a focus on large-cap growth.

Its performance has been even stronger than that of the Nasdaq Composite, with a total return of 803% for the 14-year period ending on December 31, 2021. Performance through the first four months of 2022 has been weak so far, down 21%, as the broader U.S. equity market reacted to negative macroeconomic headlines around rising interest rates and inflation, as well as geopolitical turmoil driven by Russia’s invasion of Ukraine. At the same time, the S&P 500 has declined by approximately 13% year-to-date.

Total Return Trends for the Nasdaq-100 and S&P 500

The strong historical price performance of the Nasdaq-100 has been supported by the fundamental strength and growth of its constituents. 

Nasdaq-100 companies have also, on average, grown their earnings, dividends and investments into R&D at a much faster rate over the past two decades.

Weighted Average Annual R&D Expense (January - December 2021, $bn) 

Weighted Average R&D as % of Sales (January - December 2021) 

The strong resilience of the Nasdaq-100 throughout 2020, when the pandemic began, can be attributed to the fact that many of these companies were central in leading the world through its recovery. After the so-called “COVID-19 Shock” of February to March 2020, the Nasdaq-100 had already rebounded to the same level as the beginning of the year by mid-April. In early September of that year, it reached an all-time high. This occurred as many of the components of the Nasdaq-100 became the enablers of a hyper-digitalized pandemic-era economy, which persists to varying degrees today. Companies such as Zoom, Cisco and Microsoft facilitated a monumental transition to working from home, while other companies, including Facebook, Google, Amazon, Netflix and Airbnb, provided the ability to shop, learn, entertain and relax from home.

Many technology companies driving the global economy are listed on Nasdaq

When delving into the growth factors of the U.S. market, “technology-driven growth and innovation” is at its core. With a 50-year track record of nurturing and growing high-tech brands, the Nasdaq stock market has been widely recognized as the core platform for high-tech stock-driven investment trends: Apple went public in 1980, Cisco in 1990, and Google in 2004. The continuing attraction of Nasdaq is the result of many other leading technology companies choosing to list on the exchange year after year, including global companies based outside of the U.S. 

The Nasdaq-100 index is one of the most promising investment targets in U.S. equities

In addition to high-tech companies with “core technologies” such as Apple and Microsoft, which are revolutionizing the global economy, many other promising companies have been selected for inclusion in the Nasdaq-100 Index. Companies such as Amazon, PayPal, Starbucks, Tesla and Netflix, which people in Japan are familiar with and use in their daily lives, are also included in the Nasdaq-100. Outside of the two biggest sectors for the index – technology and consumer – there are other important innovators in areas such as healthcare and, specifically, biotechnology. Moderna and AstraZeneca developed two of the earliest Covid-19 vaccines, while Regeneron and Gilead brought to market two therapeutics against the virus, which were approved in Japan in 2021 and 2020, respectively. Other biotech constituents of note include Illumina, which has been at the forefront of genomics, as well as Amgen and Biogen. These companies have become leaders in their respective industries and, in many cases, are still experiencing strong growth in their businesses even in the post-pandemic era.

We have described the characteristics of the Nasdaq-100 and the growth potential of its constituents. When looking to invest in individual promising companies in U.S. equities, researching stocks from companies selected for the Nasdaq-100 can be a powerful selection method.

There are also a number of investment products that are linked to the Nasdaq-100 Index, such as ETFs and index funds that are denominated in US dollars or hedged against foreign exchange rates. By investing in investment products linked to the Nasdaq-100, one can diversify investments across a wide range of industries while focusing on growth companies, thereby reducing investment risk. If you are considering investing in U.S. stocks in the future, the Nasdaq-100 is an index that you should definitely check out.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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