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A
Today's Animal Spirits Talk youk Book is brought to you by Nasdaq. Go to nasdaq.com to learn more about the Nasdaq 100 research on the Nasdaq. All these things. Nasdaq.com to learn more.
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B
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 Ritholtz Wealth Management. This podcast is for informational purposes only and should not be reliable upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
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A
Welcome to Animal Spirits with Michael and Ben. On today's show, we talk to Mark Merricks. Mark is the global head of index insights for NASDAQ. We talk about the history of the NASDAQ 100. I learned a lot on today's show.
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C
There's new rules about inclusion, which makes sense. Listen, it's not 19 whatever anymore. Like things have changed and so the criteria for inclusion has to be modernized and updated. And it was when we get into
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A
that, mainly because companies are staying private longer and coming public at bigger valuations.
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C
Right, right, right. It's not the 2022 NASDAQ 100 anymore. Ben. New things have come to light and it's been a minute, but we're having that conversation again. That conversation being is this 1999 all over again? And so they've done awesome work. They published a couple of papers about the differences between the index construction in 1999 and today. We got into all of it.
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A
A lot of really good charts. There's some data that. There was a data point in this podcast that blew my face off. There's a ton of great stuff here about now versus.com bubble history of the NASDAQ 100. We did all that and a lot more with Mark Merricks from nasdaq.
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C
Mark, welcome to the show.
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B
Thanks, Michael. Great to be here.
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C
So we've spoke, spoken with you before. We've, we speak about the NASDAQ 100 seemingly every week. I was like, oh, what are we going to talk about? It's, you know, only so many times we can mention it. And I was wrong because there's so much talk about because there was a lot happening in the Nasdaq 100 ecosystem. Famously, Nasdaq shared rights with Invesco to launch the QS back in whatever year that was was it night was it did it launch in 1999 or 2000?
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B
1999, yeah.
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C
Unreal. There was news recently that both Blackrock and State street are also going to be going to have access to use the name the NASDAQ 100. And last week I was reading a blog post from this guy, Mark Rubenstein, who writes a wonderful post called Net Interest. And he was talking about some of the potential rule changes, which maybe we'll talk about today to get into the NASA 100. Of course, the market structure is radically different today than it was back when the rules were invented. So maybe a facelift makes sense. But one of the things that Mark said was in the past 12 months it earned meaning Nasdaq, it earned $854 million in licensing fees, of which around a third are from the qs. So you guys have this wonderful post looking at what's it called, the, the NASDAQ 100 ecosystem, the evolution to power investor choice worldwide, where you share just how gigantic the NASDAQ 100 ecosystem is. And on top, you've got this big black bubble that's $1.4 trillion with webs going out all over the place showing what, what that encompasses. So the cues as of whenever this was published, $351 billion, the QMS, you've got mutual funds, you've got derivatives. I mean, the structure notes. This is a massive. I know I'm not breaking news here. This is a massive, massive ecosystem. And I don't even have any questions for you. This is a terrible lead in. Where should we start? I'm asking you, the guests, where should we start?
- [03:56]
B
I mean, I'll start with, you're saying it's not breaking news in the sense that this has been building for years now and we just happened to write a paper on it for the first time a few months ago. My team did, and we're sort of the Global Index insights team at nasdaq. I think though, it is news for a lot of everyday investors when they sort of look at the numbers on the page for the first time and actually try to think about what it means to have a trillion plus ecosystem around this index, given that, you know, like you said, 1999 was really the first major product launch for most types of investors. There were products in the option space before that, but 1999 was that first ETF launch. And over the last several years, I would say is when things have really gotten into high gear in terms of all these different flavors of accessing the NASDAQ 100 through ETFs. Which is such a great incubator of creativity in terms of product development and bringing different types of strategies to different investors. And then that's really only one half of the story, one half of the chart that we came up with. The other half is everything else that's happening in the derivative space, the future space, structured products, insurance products, which includes things like fixed index annuities, registered index, linked annuities. That is almost half of the pie on its own. Right? And so when we looked at this, we tried to think, okay, what's the right way of summing all of this together? Don't pick a single date at the end of the year. There's seasonality with things like derivative notional. Obviously the market goes through cycles over the course of a year in terms of performance. So we looked at average 2025. What's the average exposure across the entire ecosystem? Cash assets under management and things like mutual funds, ETFs, derivatives, notional 1.4 trillion. That was 35% growth over 2024. And really, when you look out at the universe of indexes that are out there, S&P 500 is the only thing that's larger than this, as far as we can tell. And there's a big gap between NASDAQ 100 and sort of the next tier below it. It really is in a unique place in its history and evolution.
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A
It's like a brand now, essentially, right? The NASDAQ 100. It's not just NASDAQ, obviously, but NASDAQ 100 itself is now a brand.
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C
It's like Nike.
- [06:23]
B
It's. It is kind of like that, right? Because people look at it as, you know, I often, when I present on this to different types of investor audiences, I ask people to do a thought exercise which is, you know, when you look at the U.S. equity market, obviously it's kind of been two big names now for several decades, NASDAQ and NYSing. And I ask and I tell people to think, okay, if you're a company, if you're Apple or Microsoft or Amazon or whoever, and over the years you've thought about going public and you've shopped around for where to have your IPO and you have these two main options, there are actually more options back in the 80s and 90s. But let's say there were these two main options and it was a random decision. It didn't matter. Didn't matter where you listed, right? Flip a coin. What are the odds that today you get to a place where the eight largest companies on the planet by market cap are all Nasdaq listed.
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C
Yeah, it's not random.
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B
It's 0.4% to flip a coin and get eight heads in a row. That's the probability. So it means something to these companies to list on Nasdaq given the success of Apple and Microsoft and Amazon and Nvidia for decades. It also means something now to be listing in a venue where you know on, in any given year. Right. Nasdaq is the leader in terms of total listings, new listings switches. We had the Walmart switch at the end of last year, which was just a monumental shift in market cap in a single day, close to a trillion dollars switching over to us. And it really now the exchange represents where the new economy sectors, not just tech, but a lot of the consumer discretionary space, healthcare in the form of Biote, some other areas. Where they choose to raise capital really matters in the sense of signifying to their investors, to the general public like, hey, how do I think about my company from a strategic standpoint? I want to be innovation driven, innovation forward and I want to be part of this community of innovators that's been built up over 50 years. I want to list on Nasdaq that's increasingly sort of part of the PR and the statements that companies release when they list or they switch. And where, where better to see that than in the NASDAQ 100 where you have those eight largest companies on the planet, not to mention 92 others that we happen to think are pretty special too.
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C
So the NASDAQ 100, getting back to this, this bubble that you have, it's $1.4 trillion. Just to break it down because I think it's, I glossed over that a little bit within ETFs. All right, so the Q's are 350, but it's not just the Qs. So the total ETFs that are linked to the NASDAQ 100 is $587 billion. You have $75 billion in mutual funds, which is like around the era, but it's still $75 Billion freaking billion dollars. You have $647 billion worth of derivatives, 51 billion instruction notes and as you mentioned, $52 billion worth of insurance. The flywheel is spinning rapidly because the importance of getting access to this capital. Now listen, I am, I am, I don't know, 85%. What I hard to handicap overwhelmingly, I believe the majority of where a stock goes not every single day, but ultimately like over, you know, over the longer term is Driven by fundamentals firmly believe that cannot convince me of otherwise. However, in the intermediary term or whatever, there's no doubt that at this level of capital, $1.4 trillion getting into this index and getting the flows, of course it matters. You'd have to be a fool to suggest that it doesn't have any sort of impact on brand, but literally like price, just money coming, of course it has to matter a little bit. And one of the things that I mentioned earlier in the show is the rules of this index were written a long time ago, before anybody who wrote the rules could possibly foresee what this was going to do to the investing landscape. And now you have companies like SpaceX that are on the road to, to be traded publicly, coming public at a valuation north of a trillion, possibly even close to two. And prior to whatever rules changes are being considered, it would have taken a minute to get into the index. So could you talk about what the previous regime looked like and whatever is public that you can share in terms of where this might be going?
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B
Sure, sure. So I'll lay it out for you, I guess in sort of high level how we used to manage the index and we did implement this set of methodology changes on May 1st that is now effective. Right. And the way we went about that is similar to other methodology updates that we've conducted over the history of the, of the index. There's been a few of those. Right. We, we had a formal index consultation process where we went out to our asset manager partners like Invesco and others, anyone who's in the ecosystem. We went out to, you know, a sampling of investors as well, to say, look, here are the proposed changes, here's why we're looking to do this. What's your feedback? And there was feedback in that process that impacted what we ended up changing and to what extent we ended up changing it. And I can go into some of that in a little bit. But sort of the high level headline, right, I think that you're getting at is the fast entry thing, which is not something that NASDAQ is alone at looking at S and P is also looking at it and some others. And I think it speaks to the evolution, again as you alluded to, of the equity markets over the last couple of decades, which is simply that when Google IPO'd, when Nvidia IPO'd, they were not trillion dollar companies, nowhere near that. Right. They were still typical sort of maybe a couple hundred million or a couple billion in terms of market cap, as they were transitioning from private to public. Now you've got, obviously everybody knows this VC has way more deep pocketbooks than they used to have. They're able to fund these companies for much longer. Private equity to some extent as well. And just the very nature of, I would say what it means to be a technology company today or to be technologically innovation driven means that you can scale way, way, way faster in terms of revenue and market value than you used to be able to in legacy sectors. And that's part of actually a piece of research that we're in the process of publishing in the next week or so. And so you have the situation, right, where companies get super, super valuable before they need to tap the public equity markets. But that ends up being the end goal for somebody like a Space X or an OpenAI or an Anthropic. And we don't know where any of those are going to list. Right. That hasn't been made public yet.
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C
I think I have an idea.
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B
I mean, you know, people bet on this type of stuff, I'm sure. Right. So you have your own ideas. Right? And so what we wanted to do was, you know, not have an index that takes potentially almost a year to respond to changes like that. Because what we used to have was an annual reconstitution in December, once a year in December. Right. We rank who are the top largest by market cap on nasdaq, make a bunch of deletions, make a bunch of additions right around that annual reconstitution event. There were other rules in place throughout the year. For example, if you were too small, if you were less than a tenth of a percent of index weight two months in a row, you would get deleted as a, as a constituent. You'd get replaced by whoever's next in line to replace you. If a company went private or switched over to NYSE or somebody else. Right. That could happen entry year. Now we have a process that's going to be a quarterly re ranking instead of annual. And we have this rule around fast entry where you look at the top 40. If you're in the top 40 by full market cap in terms of your ranking, you can be evaluated on the seventh trading day and if you're eligible, you'll be added shortly after that with all the other sort of liquidity requirements remaining. And so there's other changes to the rules in place here around things like float where, you know, you used to have to wait till 10% of your shares were publicly floated to get added, then you'd get added at your full Sort of listed market cap. We looked at that and decided there's ways to improve that. There's ways to sort of scale up your inclusion in the index. If you're still a low float company until you get to have about a third of your market value float publicly floated, then you're sort of, you stop getting scaled up. Right. So there's some of these other changes that we made on the margins to again make the index more reactive, more representative, more responsive to what's going on in the market.
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A
What if you just said we're going to market cap weighted, would that just cut through everything? And why isn't it just market cap weighted where you say, hey, we're just going to take the biggest hundred stocks?
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B
Well, that, that is what we're doing now.
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A
That's kind of what it is. What the new rules are then I
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B
guess the new rules are. So let me put it a different way. Right. There's a, there's a whole separate consideration to how index methodologies work, which is also from the asset manager's perspective, Invesco or somebody else who has to actually track this. Right. And implement and try to stay as close to the index sort of weights and constituents day to day. Right. You want to sort of reduce the noise day to day in terms of how much you are trading in and out of that portfolio to ensure full replication or nearly full replication. Right. And so you could in theory do it like every day. You could say who are the top 100 ranked companies every single day. But then you have market movements every single day and you're trading around that and re ranking and it's not necessarily the most efficient thing to have it update that frequently. But quarterly is actually quite common. A lot of the indexes we've launched in recent years tend to follow more of a quarterly rebalance and reconstitution schedule. And so this eliminates a little bit of the intra quarter noise other than it has this fast entry criterion for the top 40 biggest names. And it also, you know, kind of eliminates this potential situation where, okay, if you just missed the December annual recon and there were no sort of intra year exits because of companies getting too small or delisting or going private, then you're not sitting out almost a year's worth of potential gains from someone big coming onto the exchange like a SpaceX, like an OpenAI.
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C
This, this is, I was about to say overdue. It sounds rude, but this makes a lot of sense, right?
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A
It's pretty, it's common sense. Yeah. You're right. So I think one of the interesting things about the. When the NASDAQ 100 first came out, the ETF, the timing wasn't great because within, I don't know, less than a year, the NASDAQ went into an 80 drawdown. Right. So the, the fact that it survived this long, I mean.
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C
Sorry, sorry to cut you off, but you're gonna love this one. I saw, I saw a tweet today from Cullen that said if you invested. Remember your, Your, your video or your post, Bob, the world's versus Market timer.
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A
Yep.
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C
Cullen said that if you invested at the peak, I don't know if it was when the queues were launched or at the peak, which is basically the same thing. And you held onto today. Lol. Easier said than done. But this is the, this is the fact, Jack, you compounded at 8.8% a year for 25 years or whatever, 26
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A
years, is that even if, even if you include that 80%, I think it was like an 82% drawdown. But the crazy thing is, if you've been invested for the past 10 or 15 years, you have no memory of that. And you look at it and you go, oh, my gosh. And I looked at this this week. In the past 10 years, the NASDAQ 100 is up almost 22% per year, which is in, like, rarefied air. It's, I mean, over 600% total return. It's kind of. It's close to like the roaring twenties or Japan in the 1980s or the, the, the returns are unbelievable.
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C
Ben's just casually mentioning every other great bubble of our time.
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A
But it makes sense in the context of, yeah, there was this huge crash before, and I think if you put those two together, then it evens out a lot. But the returns are just kind of hard to. Hard to fathom. And I think mentioning those other bubbles, people look back and go, oh, geez, this is one of those. Because if you just look at history, when you have these types of crazy returns and you have the innovation that we've had, the excesses always get taken too far. Everything swings in one direction, and then it swings the other way. And, like, this is one of those things. So everyone, of course, is now trying to say, all right, the NASDAQ is in a bubble. This is just like 1999. You see those comparisons on a daily basis. Now you've got a really good piece about this. Asking the question, is AI another bubble? Like, what did you find in terms of the differences here?
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B
So there's A lot of differences. I mean, you guys mentioned it, you know, early on that for investors, fundamentals are the thing that matter the most in the long term. And that is a big part of the story that we tell every single day, which is if you condense down the NASDAQ 100 sort of pitch to a 10 second elevator pitch. The way I explain it to investors is in the 21st century, innovation is what disproportionately drives growth. Whether you're a company, whether you're a sector, whether you're an entire economy. Sustainable innovation driven growth is what drives longer term fundamental outcomes, preferable fundamental outcomes. And that's over the long term, how you get equity market outperformance. So when you look at the last 20 years, right, you gave some stats of your own in terms of annualized performance. Last 20 years, annualized performance is around 15% a year. Earnings have been compounding at about 15% a year on this index for the last 20 years. Right. So when you, when you benchmark it against what the fundamental growth has been, actually depending on the day, a couple weeks ago when we were still quite a bit lower in the markets, more generally, depending on the day, we're actually trading at a lower PE than we were in the mid 2000s.
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A
So you said 15% earnings growth for the past 20 years. Holy smokes.
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B
Wow. Yeah. Look at the PE today and it's like, okay, people are always going to cherry pick whatever number suits their story and they'll cite a pe in the mid-30s on a trailing basis and say that's expensive. Historically we just had, we're on track for 45% year over year EPS growth on the index this quarter for the full year, it's going to be probably north of 30%. So when you look on a forward basis, the PE is only around 26. When you looked at the forward PEs back in the late 90s, they were at 100 or even higher. You know, some of the math gets a little bit tricky because not all the data is still there for all the companies that don't exist anymore. But it's a totally different story. It's almost like a reverse. You know, it's like a mirror image where you look at the entirety of the index, right? Most of the index was at what you would consider a really expensive PE. 50, 60 or even over that. Nine out of the top 10 names were at a PE of a hundred or more. Today it's the exact opposite. Most of the names are like under 40 pe. Nine of the top 10 names are within something that's very reasonable. Tesla's the one outlier. They've always been an outlier in terms of being able to sell their particular story and their brand to their investor base and maintain that high valuation. But it's very different from whatever perspective you take, whether it's valuation, whether it's earnings growth, whether it's cash flow, the size of the companies. Right. Like if you were to, and I'm not saying this can't happen, but if you were to forecast a repeat of the early 2000s at an 82% drawdown, whatever it was on the Nasdaq 100 to happen again today. The Nasdaq 100 today is more than 50% of the S&P 500. Back then it was like 10 to 15% depending on the day. So you would have a completely different market reaction to an 80% plus collapse at EPS and an accompanying 80% plus collapse in the most fundamentally sound, fastest growing, most stable part of the market. When you look at a lot of the companies that sort of form the backbone of the NASDAQ 100 and you know, the next tier beyond that as well, it's just very, very, very different market environment.
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C
I think, Mark, I think you'd have to be, you'd have to be very dense to not at least appreciate some of the comparisons to the dot com bubble. But I think you'd have to be an idiot to suggest that this is the same thing because it just fundamentally is not. Is there excessive enthusiasm around tech? Yeah. Is that sort of around where it stops and starts? In my opinion, I believe so. You have a great slide comparing the net margins in 1999 and the net margins today. 20% of the index today has a net margin, a net margin between 50% and 100%. You had zero companies in that bucket in 1999. 50% or just over 50% are between today have margins between 25 and 50%. Back then it was half of that. So you ask, all right, well, where did the 1999 margins fall? Mostly here's where they fell. 43% of the index had margins between 10 and 25%. Not great. Another 21 was between 0 and 10%. That compares to less than 9% today. And 10% of the index was negative in terms of their margins. So yes, Cisco and in Thailand, Oracle and Qualcomm, you know, obviously did amazing things and were great companies in their own right. But at the index level there was a lot of garbage. And the valuations of these garbage companies, not all of them were through the roof. The valuations today look much more reasonable. Now. Maybe a fair counterpoint is that, well, all right, if Nvidia had a premium multiple, it would be 25% of the index. Fair point taken. A lot of differences, a lot of, you know, some similarities. But when you, when you look under the hood into the fundamentals and forget about the anecdotes and the anecdotes don't do not. Well, I guess people are trading today too. Maybe not to the same extent anyway. I don't think this is 1999. If anything, it's 1998.
- [24:29]
A
I like this chart in here on the PE bucket. So you, the PE, you show in, in 99, it looks like, I don't know, eyeballing it, 75% or so, the companies are trading at a PE or 60 or higher and today it's less than 20%.
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C
Yeah, come on.
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A
So, yeah, you're right. If you look at it on a whole, it's much different, I guess maybe where probably Michael and I would follow, the boring answer would be like, of course you're not going to compound at 22% per year going forward. That can't continue forever unless earnings keep going up as much as they have. So it has to, like you said, it's got to be a fundamental thing to keep this, this train going potentially.
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B
Yeah, I mean, look, I, I'm not in the business of issuing forecasts, although, you know, we, we look at as much data on my team as possible to try to sort of understand some of these historical parallels and understand, you know, if you are going to make a forecast, what, what, what, what are the ways that you can go about doing it, right? You can look at what's the entirety of the sell side community saying for each and every single company, right. And sort of weight that according to their position in the index and say, okay, here's a forecast based on what analysts think. Bottom up, you could look at something like, you know, the regression of index performance against forward EPS growth over several decades, which we have. Right. And that tends to be a pretty good estimator because again, over the long run that's what we see. We see 15% or so annualized performance, 15% compounded EPS growth over two decades pretty much now. Right. And so if you are looking out and you're seeing we're expecting 20, 30% earnings growth on the index over the next year, we're on Track to deliver 45% this quarter. It's hard to be very bearish in Those types of dichotomies where like on the one hand everything on paper is telling you looks great and on the other you have this historical analog in your head and you're trying to make it fit. And of course it's never going to be a perfect fit. But like you said, there are similarities, right? There's a massively new disruptive tech now in AI that's massively concentrated in this index. And it's sort of, you know, all the intricacies of how the companies are approaching the investment towards that technology and the benefits that they're getting from it. That to me is the much more interesting conversation to have as opposed to like, oh, hey, you know, we're already up this much. There's a new technology that means it's a bubble. That means selling. That's, that's not, to me, that's not that interesting of a story.
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C
Mark, maybe we could close here. You guys have a triple QM which was launched in, I believe this looks like what, 20, sometime in 2020.
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B
2020 sounds right, yeah.
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C
Okay. End of 2020. And it's the NASDAQ 100. It's another NASDAQ 100 ETF. It is a lower. What's the difference? Does this say lower priced version or what exactly is the difference?
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B
If you recall reading some of those articles about the triple Q proxy process that went on last year with Invesco,
- [27:28]
C
that was fun for shareholders, given that was.
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B
That was. Yeah, that was. Sounded like it was not so fun for a lot of people. Right. Huge investor base. Right. That built up over 25 plus years. Fun fact, by the way. NASDAQ was the original owner of the QS. We only transferred it to PowerShares, which was a predecessor company of Invesco, several years after the fact. But we were the initial sort of creator or an owner of it. And as part of the way that the fund was structured, it was a UIT. It wasn't a pure ETF in the way that ETFs are structured today. It had these special rules in place in terms of certain amount of money must go to the index. You know, the index administrator. A certain amount has to go to the marketing administrator, the custodian, and the rest has to go to marketing. That's why you saw the ads every March Madness, you know, like on. On Infinite Loop. Right. You didn't see that so much this year that's changed. That's part of the process that now Invesco, having gotten these rules to be approved, is able to retain a lot of that expense ratio on the QS, which they lowered from 20bps to 18. They launched QQQM years ago to try to capture some of that and say, hey, here's a slightly cheaper 15bps version of the QS that is meant to be more of a longer term buy and hold vehicle. There are a few different things that they're able to do there that are, that are a little bit different day to day managing the fund. But that's been a great, obviously very successful product. It's, it's at 90 billion already.
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C
Yeah, it's May 11th when we're recording it. It's $90 billion in assets. So. Oh my God. On behalf of investors everywhere, let's hope this $1.4 trillion keeps going up into the right. It's been an incredible ride. I don't think anybody could have foreseen the success, but it's, it's, you know, as it all comes down to the back to the businesses. If Apple and Amazon and all of the other monster constituents weren't growing at the insane rates, I think Google just beat their estimates by 90%. I mean, it's a joke at this point. If they weren't doing what they were doing, the stock prices would not reflect the reality on the ground. So Mark, for people that want to learn more about some of the amazing research reports that you guys are putting out, we'll enter in the show notes of course. But where can we send them?
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B
Send them to NASDAQ.com and have them start looking for, you know, the NASDAQ 100 landing page research and insights. We got a QR code that we can hopefully display at some point to do an easy signup and you'll see more of us hopefully in the future.
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C
Awesome. Thanks Mark.
- [29:56]
B
Thank you.
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A
Okay, thank you to Mark. Remember, check out nasdaq.com to learn more. Check out our show notes for all these great charts from Mark's research and email us animalspiritscompoundnews.com
- [30:11]
B
Some follow the noise. Bloomberg follows the money. Whether it's the funds fueling AI or or crypto's trillion dollar swings, there's a money side to every story. Get the money side of the story. Subscribe now@bloomberg.com.