Talk Your Book: A Short History of the Nasdaq 100

Summary

Animal Spirits Podcast: Detailed Summary of “Talk Your Book: A Short History of the Nasdaq 100”

Release Date: February 17, 2025
Hosts: Michael Batnik and Ben Carlson
Guests: Emily Sperling (SVP and Global Head of Index at Nasdaq) and Mark Merrick (Senior Director, Index Research and Development at Nasdaq)

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Introduction

In the episode titled “Talk Your Book: A Short History of the Nasdaq 100,” hosts Michael Batnik and Ben Carlson delve into the evolution, significance, and mechanics of the Nasdaq 100 index. Celebrating its 40th anniversary, the discussion is enriched by insights from Nasdaq’s own Emily Sperling and Mark Merrick. The conversation covers the index's origins, its transformation over four decades, and its current role as a cornerstone in modern investment portfolios.

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Origins and Historical Evolution of the Nasdaq 100

Founding Purpose and Initial Composition

The Nasdaq 100 was established in 1985 with the primary aim of representing the top 100 non-financial companies listed on the Nasdaq exchange. Emily Sperling elaborates on its unique construction:

"The NASDAQ 100 was originally constructed to represent those companies that choose to list on Nasdaq. [...] It’s a benchmark of the 21st century."
(Emily Sperling, 04:41)

Initially, the index comprised smaller, less mature companies, primarily in the tech sector. Mark Merrick highlights the early sector distribution:

"Back in 1985, about a quarter of the index was tech, 20% was consumer services. By 1995, that had already shot up to over 50% tech."
(Mark Merrick, 05:27)

Growth in Market Cap Share

Michael Batnik notes the dramatic growth of the Nasdaq 100 in relation to the broader market:

"The NASDAQ 100 was something like 15% of the S&P in 1999... and now it's like 50% of the index."
(Michael Batnik, 02:21)

This expansion reflects the maturation and increased market capitalization of companies within the Nasdaq 100, distinguishing it from its early years dominated by the dot-com era's volatility.

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Sector Composition and Diverse Holdings

Tech Dominance and Beyond

The Nasdaq 100 has long been synonymous with technology, but it also includes companies from other sectors. Mark Merrick explains the sector exclusions and inclusions:

"The only sector-based rules have been the financials exclusion since it was launched."
(Mark Merrick, 05:27)

While tech remains the dominant sector, comprising about 50-60% of the index, it also features significant representations from consumer discretionary and healthcare sectors. This diversification includes unexpected heavyweights such as Pepsi (which switched from NYSE to Nasdaq) and Honeywell, highlighting Nasdaq’s appeal beyond traditional tech companies.

Notable Holdings and Shifts

Michael highlights notable companies that have transitioned to Nasdaq, enhancing the index's prestige:

"Companies like Pepsi... switched over to NASDAQ around a decade ago."
(Michael Batnik, 07:15)

Ben Carlson adds that companies often choose Nasdaq to align with its innovative brand, signaling their commitment to growth and forward-thinking strategies.

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Reasons for Listing on Nasdaq

Brand Association with Innovation

Mark Merrick emphasizes the strategic reasons companies opt to list on Nasdaq:

"Companies want to be perceived as being innovative and pioneering within their sectors."
(Mark Merrick, 08:23)

The decision to list on Nasdaq is not random; it’s a calculated move to associate with an exchange known for technological advancement and a growth-oriented environment.

Access to Passive Capital

Emily Sperling points out the financial incentives tied to listing on Nasdaq:

"Given the growth of the assets under management that track the NASDAQ 100, passive capital is immediately available to your cap table."
(Emily Sperling, 11:27)

This access to passive investment funds adds significant value to being part of the Nasdaq 100, influencing companies to seek inclusion in the index.

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Index Methodology and Maintenance

Market Capitalization Weighting

The Nasdaq 100 employs a market cap-weighted methodology, ensuring that larger companies have a proportionate impact on the index’s performance. Michael Batnik remarks on the simplicity and effectiveness of this approach:

"It's so simple, yet it's such a powerful force of market cap weighted indexes is that you get the cream rises to the top."
(Michael Batnik, 12:14)

Reconstitution and Annual Adjustments

Mark Merrick details the annual reconstitution process:

"The official index methodology includes an annual reconstitution every December."
(Mark Merrick, 12:56)

This process involves ranking companies based on their market capitalization at the end of November and making necessary additions or deletions to maintain the top 100 non-financial companies.

Capping to Manage Concentration

To address concentration issues, the index incorporates capping rules:

"We cap the biggest holdings down every single quarter... If as a group, the names that are over 4.5% exceed 48%, those get capped down to 40%."
(Mark Merrick, 17:34)

This mechanism ensures that no single company or group of top holdings disproportionately influences the index, maintaining its investability.

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Handling Concentration and Regulatory Considerations

Concentration in Top Holdings

The Nasdaq 100 has seen significant concentration in its top ten holdings, often comprising around 50% of the index:

"Historically, the concentration across the top 10... has been consistently around 50% for the last 10 years."
(Mark Merrick, 19:25)

To mitigate excessive concentration, the index’s methodology includes regular capping and rebalancing, especially when mega-cap companies like those in the MAG 7 dominate.

Regulatory Compliance

Emily Sperling assures that the index adheres to regulatory standards concerning concentration:

"We make it a priority because we want our products to be investable. The rules in our methodology account for some of the regulatory rules around concentration."
(Emily Sperling, 17:15)

This compliance ensures that the Nasdaq 100 remains an attractive option for investors seeking diversified exposure without undue concentration risk.

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Innovation and Thematic Focus

Quantifying Innovation

Mark Merrick discusses how Nasdaq defines and measures innovation within the index:

"We track R&D expenses and patent filings to quantify innovation. These metrics help predict technological advancements."
(Mark Merrick, 27:43)

By analyzing research and development spending and patent activity, Nasdaq positions the Nasdaq 100 as an innovation-centric index, appealing to investors focused on cutting-edge technologies and growth potential.

Impact of Innovation on Index Performance

The high level of innovation within Nasdaq 100 companies translates to robust growth and resilience:

"Companies in the NASDAQ 100 spend around an order of magnitude more on R&D versus the rest of the US large cap universe."
(Mark Merrick, 27:43)

This focus on innovation drives the index’s performance, making it a preferred benchmark for modern, growth-oriented investment strategies.

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Comparison with Other Indexes

NASDAQ 100 vs. NASDAQ Composite

Michael Batnik raises a critical comparison between the Nasdaq 100 and the broader Nasdaq Composite:

"When do you think that the NASDAQ 100 really like firmly became like kind of the head of the class versus the NASDAQ composite?"
(Michael Batnik, 26:12)

Emily Sperling clarifies the distinction:

"The NASDAQ 100 is 100 of the largest non-financial stocks, while the composite includes around 4,000 companies."
(Emily Sperling, 26:32)

The Nasdaq 100’s focused composition makes it a more prominent benchmark compared to the extensive Nasdaq Composite, solidifying its status as a leading indicator of large-cap growth performance.

NASDAQ 100 vs. S&P 500

Ben Carlson touches on the growing prominence of the Nasdaq 100 relative to traditional benchmarks like the S&P 500:

"The NASDAQ is becoming the new S&P 500... you're in the conversation as one of the preeminent benchmarks in the world."
(Ben Carlson, 15:33)

Emily Sperling emphasizes differentiation:

"The Nasdaq 100 represents companies only listed on Nasdaq and focuses on large-cap growth, unlike the broad-based S&P 500."
(Emily Sperling, 15:33)

This specialization caters to investors seeking focused exposure to high-growth sectors, distinguishing the Nasdaq 100 from more diversified indices.

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Inclusion Criteria and Listing Process

Eligibility and Seasoning Requirements

Mark Merrick outlines the criteria for a company to be included in the Nasdaq 100:

"You need three months of trading before being added to the index."
(Mark Merrick, 19:49)

This seasoning period ensures that only established companies with proven market performance are considered for inclusion.

Recent Trends in Listings

Emily Sperling mentions recent milestones in Nasdaq listings:

"We recently hit the 500th switch from NYSE to Nasdaq in 2024."
(Emily Sperling, 14:29)

Such transitions reflect Nasdaq’s growing appeal among large-cap companies seeking the benefits of being part of the Nasdaq 100.

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Resilience Through Market Cycles

Historical Performance and Stability

The hosts discuss how the Nasdaq 100 has navigated various market cycles, including the dot-com bubble and the Great Financial Crisis. Mark Merrick provides a nuanced view:

"The companies in the NASDAQ 100 are much more mature and represent most of the fundamental growth in the S&P 500 over the last decade and a half."
(Mark Merrick, 21:30)

Michael Batnik underscores the maturity of current holdings compared to early iterations:

"The quality of these companies and the cash flows they produce make another bubble like dot-com less likely."
(Michael Batnik, 22:55)

Concentration of Mega-Cap Companies

The dominance of mega-cap companies contributes to the index’s stability and growth:

"The eight largest companies globally are all Nasdaq-listed and part of the NASDAQ 100."
(Mark Merrick, 10:23)

This concentration, while managed through capping rules, ensures that the index benefits from the consistent performance of these industry giants.

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Innovation and Future Outlook

Defining and Tracking Innovation

The Nasdaq 100’s focus on innovation is meticulously tracked through R&D spending and patent activity. Mark Merrick elaborates:

"We use R&D expenses and patent filings to quantify and predict technological advancements."
(Mark Merrick, 27:43)

This data-driven approach positions the Nasdaq 100 to continue leading in sectors poised for future growth, particularly in areas like artificial intelligence and biotechnology.

Expanding Global Reach

Emily Sperling highlights the international growth of Nasdaq index products:

"Our index is now available with around 80 products listed outside the US, catering to global investors."
(Emily Sperling, 15:06)

This expansion underscores the Nasdaq 100’s increasing influence and accessibility worldwide, attracting a diverse investor base.

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Conclusion

The 40th anniversary episode of the Animal Spirits Podcast provides a comprehensive look into the Nasdaq 100’s journey from a niche index to a global benchmark for large-cap growth and innovation. With insights from Nasdaq’s leadership, listeners gain a deep understanding of the index’s origins, evolution, and strategic importance in today’s financial landscape. The Nasdaq 100’s emphasis on mature, innovative companies and its robust methodology for managing concentration and inclusion ensure its continued prominence as a key investment vehicle.

"The Nasdaq 100 has become a preeminent benchmark for large-cap growth and innovation, reflecting the companies that are driving the future economy."
(Emily Sperling, 04:41)

For more information on the Nasdaq 100 and related products, visit nasdaq.com.

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This summary captures the essence of the podcast episode, highlighting the key discussions and providing direct quotes with proper attribution and timestamps to enrich the narrative.

Transcript

[Michael Batnik]

Today's Animal Spirits Talk youk Book is brought to you by Nasdaq. Go to nasdaq.com to learn more about the Nasdaq 100, which is celebrating its 40th anniversary this year. All the other different products and indexes that Nasdaq offers. Nasdaq.com to learn more. Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Rithol's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Michael, I feel like the Dow is still the only index where you talk in terms of points, right? The dow is up 500 points or is down 500 points. You don't really talk about the S and P or the NASDAQ 100 in terms of points. But let's look at the NASDAQ 100. It topped out at about 4,500 in 1999, early 2000 for the DOT com boom and bust. It bottomed in the 800-00, call it in March 2009. So pretty big fall it is now. It reached in December the highest level ever of just over 22,000. It's in the 21,000 now. So 800ish to over 21,000 since the dot com or since the great financial crisis ended. Not a bad run. And it's become one of the, one of the preeminent benchmarks that there is and dare I say, a core holding for many investors these days.

[Ben Carlson]

So we spoke on the show like, when did this happen? There's not like a, there's not a moment in time and maybe there is not as far as as I could tell. But if, if you could say like, okay, when did, when did Jim Cramer start opening his show? Because I, I'm, I think when I used to watch Kramer, it was like the Dow did this, the S and P did this, and the Nasdaq did that. But there's definitely a point in time in which the Nasdaq entered the chat. You know what I mean?

[Michael Batnik]

It entered the chat. I think that it kicked the door down in the 2020 for sure.

[Ben Carlson]

I'm just saying like specifically on his show. But yes, in a broader sense there. So like back in the day, people would say if they were like going to index. You would say, why would I just own the S and P? And now there it's nothing to hear people say why would I just own the Nasdaq? The Nasdaq 100?

[Michael Batnik]

Yes, again, it's become a. And I think some people probably do a little bit of both to say I'm going to own the S and P or the total stock market, whatever, and I'm going to own the Nasdaq to get more concentration in these bigger tech names. So it's the 40th anniversary of the NASDAQ 100 this year. So we talked to Emily Sperling, who's an SVP and global head of index at Nasdaq, and Mark Merrick, who is a senior director, index research and development and they kind of gave us a lot of the background on the index. I think the my one big takeaway here that you and I have been talking about a lot and I didn't realize the numbers. So he was saying the NASDAQ 100 was something like 15% of the S&P in 1999. So it was much smaller companies. Right. It was more immature. These companies are still up and coming and now it's like 50% of the index or something. And it makes more sense that it's just things are just more mature in that space now than they were. And so anyone predicting a.com like crash I think has to contend with that reality that these are not the same types of companies. Things are far more mature and high quality than they were in the past. So anyway, we learned a lot, we talked a lot about the NASDAQ 100, its history, some counterintuitive things you may not know. So here's our talk with Emily and Mark from NASDAQ. Mark and Emily, welcome to the show. So 40th anniversary for the NASDAQ 100 feels kind of monumental as a birthday. What was the impetus for starting this index in the first place that now has become sort of a household name for investors?

[Emily Sperling]

The NASDAQ 100 was originally constructed to represent those companies that choose to list on nasdaq. It's unique in its construction compared to other market based indexes out there because it is China's simple in its rules and why 40 years is important. And the evolution of this index is so significant is because it's become so much more than that. So the essence of the index is more about the companies that choose to list with us and what they represent. And they really represent growth, forward thinking mindsets and disrupting their respective markets in what they're trying to achieve to drive the future economy. So it's really at this point a benchmark of the 21st century.

[Ben Carlson]

What was the thinking behind nine financials at the time?

[Emily Sperling]

So funny. The reason why we created this index is because we were creating an index of the top 100 financial companies listed on NASDAQ 40 years ago. So this is actually its kind of sister index that has taken on a life of its own in terms of why it was originally created.

[Ben Carlson]

So Wall street punditry, whenever they're Talking about the NASDAQ 100 on financial TV, they always say the tech heavy Nasdaq. And it is true, it is very much a tech heavy index. But I think some people would be really surprised to see some of the holdings in here that have nothing to do with the semiconductors and the AI stuff of the world. Was that like a new rule or something? Like when, when did that happen?

[Mark Merrick]

Yeah, so I mean, look, the only sector based rules around this index have been the financials exclusion since, since it was launched. So that's sort of just a quirk of history. When we launched the index in 1985, tech as a sector was just not that big yet in the US So when you look at the exposure back then, in 1985, about a quarter of the index was tech, 20% was consumer services. By 1995, that had already shot up to over 50% tech. And we've kind of been there ever since. So it was that late 80s, early mid-90s tech boom, the original Internet boom. Right. That kind of, I think, led to the growth of tech as a sector, generally led to a ton of tech listings at Nasdaq. And we've been at around 50 to 60% tech for the index, depending on what system you use, for about 30 years now. So it is tech heavy. There's no way around it. But we prefer using the moniker New Economy Index. When you take together the companies that are in sort of traditional tech plus consumer discretionary, which includes names like Amazon, Tesla, Netflix plus Healthcare, which for us at Nasdaq is almost all biotechs that list on Nasdaq and are in the health care sector, those three together give you about 80 to 85% of the index exposure any given quarter, any given year.

[Michael Batnik]

And so making it onto the list, it's really not that hard. It's not, you have to jump through a bunch of hoops. It's basically you're listed on the Nasdaq and you become one of the biggest companies because this is a market cap weighted index. Correct.

[Emily Sperling]

As long as you are a non financial company.

[Michael Batnik]

Right. Okay, that makes. So what are some of the companies that are in here that would surprise some people? Like what is a NASDAQ 100 company? That people go, oh really? I didn't realize that's a blue chip or that's like, what are those companies?

[Ben Carlson]

Pepsi. Isn't Pepsi in there or.

[Mark Merrick]

No, Pepsi's in there. Pepsi is one of those companies that switched over to NASDAQ around a decade ago from the New York Stock Exchange. And we've had a number of those switches in recent years. Honeywell is another good example. Companies that I think they've looked at the history of the index and they've.

[Ben Carlson]

Said, look, we want in, right?

[Mark Merrick]

Maybe we're not tech, but we want to be sort of thought of as being innovative and pioneering and groundbreaking within our actual sectors that we operate in. So that's become part of a signaling mechanism to some of these other companies that have come in either from switching their listing or just deciding to list on NASDAQ over the years and wanting to be part of that elite sort of innovative flock of companies that have been here.

[Michael Batnik]

So Mark, you talked about how some companies will list on Nasdaq because it's almost like a brand awareness thing. How big of a part of the decision is that for wanting to be at least perceived as one of these forward looking companies? When a company decides which exchange to list on?

[Mark Merrick]

I mean, probably folks from our listings business would be best to answer that, but I'll give it a crack, right? Which is that even looking at a company like GE which split itself up a couple of years ago into multiple spinoffs, right, they decided to have their healthcare focused spin off GE Healthcare list on nasdaq. I think it's another example of when you look at the history, right? And at this point we're up to eight largest companies in the U.S. i think eight largest companies globally are all NASDAQ listed. They're all part of the NASDAQ 100. Basically take Mag 7 + Broadcom, we call them the NDX Mega Caps. They're all over a trillion in market cap. So I want you to do this kind of mental exercise of thinking, okay, if over the past decades you are one of these companies and your decision to list Nasdaq vs NYSE is a random process, it's a coin flip, what are the odds that you get eight heads in a row over the course of four decades and you get all eight of these companies Ending up on Nasdaq, right? The odds are 50% for any one decision. But to get eight heads in a row, it's less than 0.5% probability. So to us that means it's not completely random. There is something going behind the scenes here in terms of companies saying, look, we want. Not just the historic association with the ones that have done really well, right? Like you had Apple in 1980, Microsoft in 86, intel the first one to kick this whole trend off in 1971, when Nasdaq was founded. But they want the ongoing association with, okay, most of where the really exciting IPOs are happening in, in the, in the new economy sectors these days, tech and health care and consumer, they are happening at Nasdaq. So they want that association.

[Ben Carlson]

So, like there is something very Wall street iconic about being at the New York Stock Exchange ringing the bell. But to your point, Mark, like, undoubtedly, and I want to hear from you, how did this happen? How did you take the crown from the king? Because you're right, all of these companies that are listed on the Nasdaq, it's not an accident. There was something that you all did, whether it's brand awareness or actual tech or distribution or whatever. How did you do it?

[Mark Merrick]

I think it started with 1971 when we were founded, first fully electronic stock market in the world, which was kind of a watershed moment for equity trading, right? You didn't have traders yelling out buys and sells in a pit for once. That's when intel decided to ipo. And I think that they really kicked off that trend of saying we want to list at a venue that is itself technologically forward thinking and innovative and disruptive. And I think you can draw kind of a straight line from that over time. And I'm sure folks on the marketing side, on the leadership side at Nasdaq have played on that over the past decades. Emily, what do you think? What do you think is the secret sauce to Nasdaq winning the listings race year in and year out?

[Emily Sperling]

Absolutely. The brand association of Nasdaq and what we represent. If you go back to what Mark was saying, us being the original disruptors of the markets because we employ technology, because we're innovative and growth oriented, and then intel choosing to list with us almost immediately thereafter, it set the stage for a brand embodiment that other people want to associate themselves with and they get a boost or a benefit from that. Both the brand association and now, given the growth of the assets under management that track the NASDAQ 100 and products linked to the NASDAQ 100, when you list with us, you have passive capital immediately into your cap table if you're a part of the NASDAQ 100, which is only available to you if you list on nasdaq.

[Michael Batnik]

One of my favorite aspects, it's, it's, it's so simple, yet I think such a powerful force of, of market cap weighted indexes is that you get the cream rises to the top and you have these big companies that the winners end up being the biggest company. Like I looked in and Nvidia wasn't in the top 10 of the NASDAQ 100 heading into the pandemic. It's. And now it's the first or second biggest company. Right. Depending on which day you're looking at. And it's because it's this market cap weighted style, it rose the top. So what happens with smaller companies though? Out of the 100 stocks, is it a once a year reconstitution when these smaller companies come up and become one of the bigger stocks, does it happen automatically on a more regular basis? How does that happen when a new stock comes in and old stock drops out?

[Mark Merrick]

Yeah, so I mean the official index methodology includes an annual reconstitution. That process happens every December in line with a ton of other indexes that reconstitute in December every year. And that process is based on, okay, you are screening everyone that's listed on the NASDAQ exchange, you're excluding financials you're ranking, to see the top 100 based on what the market caps are as of end of November that year. Right. And then there are some nuances baked into the methodology that prevent excessive turnover year over year. I don't know that we need to get into the details here, but pretty much right. If you are in the top 100 as you get towards the end of each year, those are the companies that will make it in. Now outside of that, you can have companies leave the index entry year, you could have an acquisition, you can have a company switch its listing over to nyse, which we've seen a few times over the years. You could also have if a company drops below 0.1% of the index weight 2 month ends in a row. And you saw some of this during COVID when a few companies got hit really hard in the travel sector. That is a criterion for getting booted out of the index. And since we always want to have a hundred companies, you'll get replaced right away by whoever is sort of next in line waiting to come in. So you do see some of those intra year additions and deletions, but most of the activity you'll see in December.

[Emily Sperling]

And Mark, maybe two things to add there. One, the fluctuation of the weighting happens every day based on the price of every stock within the index. So you can see stocks in the index like Nvidia over the course of a year. The percentage weighting that they take up changes based on their actual price value as well. And then secondly, Mark mentioned that companies move from Nasdaq to NYSE, but importantly companies move from NYSE to Nasdaq. And we just recently hit the 500th switch from NYSE to Nasdaq in 2024, which was an exciting milestone for us as an exchange as well.

[Ben Carlson]

So an exciting little rivalry between you and them. But also I remember probably 10 years ago Josh said that the NASDAQ is becoming the new S&P 500. And I don't know that I took that seriously at the time. But incredibly, it does seem like you guys, and not like, not like recently, but like you've, you're in the conversation as one of the preeminent benchmarks in the world. And that definitely wasn't always the case.

[Emily Sperling]

Absolutely. I think there's differentiation between what the S&P 500 is and what the Nasdaq 100 is. I mean, importantly, the Nasdaq 100 represents companies only listed on Nasdaq. So the S&P 500 is largely a broad based market index. The Nasdaq 100 has become a preeminent large cap growth representation. So we, we've kind of taken on this piece of the portfolio or we belong in somebody's portfolio as a large cap growth product, which has been an evolution. And I'd say that's driven by the companies that are within the NASDAQ 100 and also the force behind it in terms of the products that are tracking it. We've brought this index from just being available or listed in the US to now having 80 or so products listed outside of the US as well. Investors globally want access to these companies and the brand. And the kind of large cap growth representation that our index has or even the representation of New Economy that Mark mentioned is really attractive to a whole set of investors and growing as far.

[Michael Batnik]

As the rules and regulations are concerned when it comes to indexes. How often do you hear from fund providers or people who are using this index to track about concentration? Because that's something that people have been talking about. It seems like this entire decade, maybe even longer, is just the Concern about the US stock market being too concentrated at the top. And if you look at the NASDAQ 100, I want to say it's, don't quote me if I'm wrong, 50% or so in the top 10 names now, because it is because those mag 7 names are so big, are there ever any rules and regulations that you bump up against because of that concentration or is that as far as you're concerned that nothing you have to deal with?

[Emily Sperling]

That absolutely is something that we deal with and we make it a priority because we want our products to be investable. So we actually, the rules that are baked into our methodology account for some of the regulatory rules that would be around concentration within the index. And Mark, I don't know if you want to elaborate on anything there.

[Mark Merrick]

Yeah, so. So this goes back to the earlier point about how the index methodology is fairly nuanced. It's about 10 pages long. The overall kind of overarching idea is very simple. Right. Give me the hundred largest on this. On the, on the exchange X financials, we do have a whole slew of capping processes in place. Some are quarterly, some are annual to make sure that a single constituent doesn't get too big, as well as to make sure that the biggest holdings in aggregate don't get too big. So we cap, we cap the biggest holdings down every single quarter. If you're over, you know, 20% of the index weight, you get capped down. If as a group, the names that are over 4.5% weight each exceed 48% as a group, those get capped down to 40% every quarter. And that's what happened in July 2023 when we had that special rebalance, we just missed that condition at the end of the second quarter. And because the mega caps were doing so well in that first half of the year, led by Nvidia, we ended up breaching that condition and having to do a special rebalance in July. So when you look at historically the concentration across the top 10 these days, it's actually not that out of sync with what you've seen, like going back to 2010, 2011, 2012, when Apple was over 20% of the index weight, at times they were sort of far and away the biggest mega cap company you saw 50, 55, close to 60% of the index weight was across those top 10. And you've seen that pretty consistently for the last 10 years or so. And they're just, they're just regularly sort of getting capped down as a group, if not quarterly, then annually when we have that capping process run.

[Ben Carlson]

Are there any rules on how old a company needs to be before it's included? The IPO window has been sealed pretty tight for the past couple of years, but there's some optimism that we might see some new issuance from large companies that ostensibly will choose the Nasdaq as our listing place. So what would happen in the event that we get a mega cap company going public on the Nasdaq, Would that automatically end, enter the index or how does that work?

[Mark Merrick]

So that happens on the Nasdaq composite because there are minimal rules on that one. But for the NASDAQ 100 and most other indexes that we have, you need three months of trading. You need a three month seasoning requirement before you get it on, get added.

[Ben Carlson]

To the index, and that's it. So after three months, we're going to see some of these names if they ever come public.

[Emily Sperling]

Well, they're seasoned at that point, but then there has to be a moment for them to be added. So it either has to be the reconstitution that happens in December or something like what Mark talked about about where a company drops out, delists or is acquired and then there's an opening for another company to come in. So it's, you know, it's seasoning plus, moment in time to be added.

[Michael Batnik]

I think one of the other cool aspects of the NASDAQ 100 in your history here is just the cycles that investors have lived through with this index. And it seems like I don't know if The S&P 500 on steroids is fair or what, but I mean, you know, the 80s things took off and then really ramped up in the 90s as, you know, as this thing became much bigger. And then you had the dot com bubble burst and then there was a massive crash. And then coming out of the dot com bubble and into the 2010s, you've had this huge upswing again. So it seems like the cycles are amplified. And I think the way that we explain this as advisors to clients is just if you want higher returns, you're going to have to accept more volatility or more higher, bigger drawdowns or whatever it is. No pain, no gain. I'm just curious how you've thought about the evolution of this over this time period where you've had these huge swings from booms to busts and everything in between.

[Mark Merrick]

I would phrase it a little bit differently, Ben. I would first point out that and this goes back to the Josh comment you mentioned earlier. I would first point out that turn of the century, this index was about 10 to 15% of US equity market cap. Last couple years it's been around 50%. So yes, it may have been more amplified in the past and certainly more concentrated in the past in terms of earlier stage companies in the tech and tech adjacent sectors. But nowadays, given the fact that you have this anchor with the eight largest companies top 10 around 50%, these are not young, unproven companies. They actually represent most of the fundamental growth that you've seen in the S&P 500 over the last few years. So to us, when we think about positioning it to our clients and our audiences, we kind of challenge them to think about it as well. What is the rest of the S&P 500 giving you? Right, there's about 80 to 85 companies that are common between the two indexes. And when you look at the companies that have been driving the growth in revenues, earnings, dividends, buybacks, cash flow, all that over the last decade, decade and a half, that's disproportionately come from this index, not those other 420 companies in the US so that's really, I was.

[Michael Batnik]

Going to say that's a really good point because part of the reason to your point that why there was such a big crash from the dot com bubble blowing up is because those companies were more immature. Right. And now they're much more. And Michael and I talk about this all the time that you never say never when it comes to the stock market. Sure, there could be a crash like that again, but it's hard to believe with the quality of these companies and the cash flows that they produce and how important they are in our lives. That's an interesting set. I didn't realize. So you're saying 15% in like 1999 of the S&P was a NASDAQ 100. Now it's more like 50% or whatever. That's very interesting.

[Mark Merrick]

By market cap. Yeah.

[Emily Sperling]

I would also say the median size of a company back when this index was first launched was 450 or so million and the median size today is 74 billion. So the companies within the index are just very different than they were back when it was launched or even from the early 2000s. Largely different in terms of the cash flows that they generated. Like you mentioned, their debt to EBITDA ratios, the different drivers of success for the companies themselves have changed. So that trade off between returns and volatility is more subdued than it was in the early 2000s.

[Ben Carlson]

One of the big themes in markets over the past couple years, especially in 2024 with the advent of the ETF has been crypto. Are there any exclusionary items that would prevent a. Like is Coinbase in the, in the NASDAQ 100, for example?

[Mark Merrick]

It is not, it is a financials company as, as per the sector classification system that we use.

[Ben Carlson]

So they must not be happy with that exclusion. I mean I'm sure they're like we're a technology company.

[Emily Sperling]

We are not the ones who determine the classifications. We use the icb which is produced by, by Footsie Russell.

[Ben Carlson]

All right, so they could take that, they could take it up with somebody else. But there's, but there's no but other than that. It's like you guys aren't like anti any particular industry other than, of course it's not, you know, there's no financials in the index.

[Mark Merrick]

But outside of that, you've got PayPal in there, right? PayPal. PayPal still classified as an industrials company because they're sort of payment infrastructure arena. Right. So PayPal has a decent crypto business that they let you buy and sell a bunch of crypto on there. Now you've got MicroStrategy.

[Ben Carlson]

PayPal is considered an industrial for now at least.

[Mark Merrick]

Yes.

[Ben Carlson]

It's still considered MicroStrategy. So MicroStrategy is listed as, Is classified as what?

[Mark Merrick]

It's a tech company. They've been a tech company for like, for like 30 years. If you look, if you look at their revenue, right? How they make revenue, it's from software, it's, it's from data visualization, type software and other things. So for now they are tech and they are in.

[Emily Sperling]

Yes. Again the classification is based on ICB rather than anything arbitrary from nasdaq.

[Michael Batnik]

That is interesting. I never knew the non financial piece. So it seems like in the that dot com boom that I was talking about, a lot of people probably mentioned the NASDAQ composite. You guys are on the same team obviously. But when do you think that the NASDAQ 100 really like firmly and became like kind of the head of the class or whatever versus the NASDAQ composite being that piece? Because it seems like the NASDAQ 100, the brand at least has usurped that. Like when did that happen? Is that just this late latest cycle?

[Ben Carlson]

No way. I'll answer for you guys. But like I, I, so I started. Well, let's say my official starting date in this industry is 2012. My prior years, I don't think that counts. So 2012 when I was like entering the ticker for the index at least I was always ndx. I was never comp or comp Q or whatever. So I feel like it's been that way for a while.

[Emily Sperling]

No, they are just fundamentally very different. You know, the NASDAQ 100 is 100 of the largest non financial stocks that represent something. The composite is every, every company that lists on Nasdaq. And by the way, it is one team. The index business is one team. So all indexes provided in the market by NASDAQ is under the same roof.

[Michael Batnik]

How many companies in the NASDAQ composite then that you take these 100 out of like what's the total number on NASDAQ?

[Emily Sperling]

Overall ballpark, I believe it's around 4,000.

[Michael Batnik]

So one of the big fund industries that has grown, I think pretty much this decade is thematics. And I think it was really when Cathie Wood and Ark came into play, the big one was like, all right, everyone needs their own innovation fund. And there was a lot of these funds and indexes created to. All right, here's our way of looking at innovation. And we've seen in recent years that the way that you define innovation can really impact your returns. And some places that people that are looking for innovation in certain places vastly underperformed other places that are outperforming. And that's certainly been sped up by AI and all these things. How do you view that term and how do you go about defining it?

[Mark Merrick]

Yeah, sure. So for us, we're constantly trying to quantify what innovation means for the NASDAQ 100. And we talk about it as an innovation centric or an innovation overweight index. And there's a few ways that you can do that with data pretty easily, right? Research and development expense, publicly available reported line item on the income statement, which we track quarter to quarter and which we can see when you, when you take a look at the data that the companies in the Nasdaq 100 spend around an order of magnitude more on R&D versus the rest of the US large cap universe. When you do it based on sort of average billions amount per company spent every year or even when you normalize it and you say, okay, give me R and D as a percent of total sales, total revenue, it's around an order of magnitude higher intensity on R and D in the NASDAQ 100 versus Rest of the S and P, rest of, you know, whatever benchmark you use to get us large cap exposure. We dig into that even further though, to Kind of reinforce that story and say, okay, what's all this R and D spending leading to? Ultimately, a lot of it is leading to patent filings. So we have access to data sets at Nasdaq because we have data businesses housed within Nasdaq that sells some of this data to hedge funds, to institutional and other investors. We use some of this data to build some of our own thematic indexes around patent valuations. Right. How do you estimate the value of a company's patent portfolio or patent classifications? Can you actually tell me of all the patents that Google filed last year, which ones related to AI? We have access to that data and we can see sort of year in and year out the concentration of patent filings that this index gives you versus rest of us, rest of the world. To the point where for some of these AI technologies like natural language processing, image recognition, deep learning, we've seen in recent years, 20, 30, 40, even as much as 50% of the global patent activity comes from Nasdaq 100 companies. To us, it's not just a buzzword of like, yeah, we think these companies have innovated because they're coming up with new products, new services. That's all very important as part of the definition, but it also comes back to hard data and hard numbers around. Is this leading to something that you can quantify and use to predict where the next technological revolution is going to come from?

[Ben Carlson]

All right, so Emily, what is your year end price target for the NASDAQ 100? I'm only kidding. Well, I think you guys are onto something with the NASDAQ 100. It could be big someday. So for people that want to learn more about the 100 or some of your other products, where do we send them?

[Emily Sperling]

You could send them. What do you think, Mark? You send them to nasdaq.com nasdaq.com you'll find it there.

[Ben Carlson]

All right, Mark, Emily, thank you very much for the time today.

[Emily Sperling]

Thanks very much.

[Mark Merrick]

Thank you.

[Emily Sperling]

Pleasure to be here.

[Michael Batnik]

Thanks again to Emily. Mark, Remember, check out nasdaq.com to learn more. Check out our show Notes as always. For more links, email us animalspiritsompoundnews.com.