Nasdaq 100 Index Options

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Nasdaq Composite Index

What Is the Nasdaq Composite Index?

The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities.

Key Takeaways

  • The Nasdaq Composite Index is a large market-cap-weighted index of more than 2,500 stocks, American depositary receipts (ADRs), and real estate investment trusts (REITs), among others.
  • The index is calculated constantly throughout the trading day with the final value reported at 4:16 p.m. daily once prices have fully settled after the 4:00 p.m. ET market close.
  • The Index’s composition is nearly 50% technology, with consumer services, health care and financials the next most prominent industries.

Understanding Nasdaq Composite Index

The Nasdaq Composite is not limited to companies that have U.S. headquarters—something that sets it apart from a number of other indexes. It is very common to hear the closing price of the Nasdaq Composite Index reported in the financial press or as part of the evening news because it is such a broad-based market index.

Nasdaq Methodology

The Nasdaq Composite Index uses a market capitalization weighting methodology. The index’s value equals the total value of the share weights of each of the constituent securities, multiplied by each security’s last price. This total is then adjusted by dividing by an index divisor, which scales the value to a more appropriate figure for reporting purposes. The index is calculated continuously throughout the trading day, but it is reported once per second, with the final confirmed value being reported at 4:16 p.m. each trading day.

Two versions of the Nasdaq Composite Index are calculated: a price return index and a total return index. The total return index includes the reinvestment of cash dividends on their respective dividend ex-dates. Both versions of the index include non-dividend cash distributions. On the market close of Sept. 24, 2003, both versions of the index were synchronized.

Changes in price due to corporate actions such as stock splits, stock dividends or spinoffs are made on the action’s ex-date. Changes in total shares outstanding due to items such as conversions, stock repurchases, secondary offerings or acquisitions are usually made on the night before the action’s effective date.

Eligibility requirements for the index are reviewed throughout the year. A security that does not meet the eligibility requirements can be removed at any time, usually at its last sale price.

The Nasdaq Composite Index is one of the most widely-watched indexes in the world and is often seen as a stand-in for the technology sector, due to its heavy weighting in technology.

Nasdaq Composite Eligibility Criteria

To be eligible for inclusion in the Nasdaq Composite Index, the security’s U.S. listing must be exclusively on the Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004, and has continuously maintained such listing). The type of security must be one of the following:

  • American Depositary Receipts (ADRs)
  • Common Stock
  • Limited Partnership Interests
  • Ordinary Shares
  • Real Estate Investment Trusts (REITs)
  • Shares of Beneficial Interest (SBIs)
  • Tracking Stocks

Security types ineligible for inclusion are closed-end funds, convertible debentures, exchange-traded funds, preferred stocks, rights, warrants, units, and other derivative securities. A security is removed from the Composite Index if eligibility criteria are no longer met.

Nasdaq Composite Composition

As of March 15, 2020, the industry weights of the Nasdaq Composite Index’s individual securities are as follows: technology at 48.39%, consumer services at 19.43%, health care at 10.21%, financials at 7.21%, industrials at 6.85%, consumer goods at 5.51%, utilities at 0.81%, telecommunications at 0.72%, oil and gas at 0.55% and basis materials at 0.32%.

Nasdaq 100 Index

The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

Weighting the Index

The index is constructed on a modified capitalization methodology. This modified method uses individual weights of included items according to their market capitalization. Weighting allows constraints to limit the influence of the largest companies and balance the index with all members. To accomplish this, Nasdaq reviews the composition of the index each quarter and adjust weightings if the distribution requirements are not met.

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Trading the Nasdaq 100 Index

The Nasdaq 100 is traded through the Invesco QQQ Trust. This product is designed to track the performance of the 100 largest companies on the Nasdaq exchange. Each company in the trust must be a member of the Nasdaq 100 and be listed on the broader exchange for at least two years. Also, listed stocks need to have an average daily trading volume of 200,000 and publicly report earnings quarterly and annually.

Some exceptions are made for newly public companies that have extremely high market capitalizations. Companies with bankruptcy issues are omitted from the Invesco QQQ Trust. On occasion, the composition of the trust may not identically match the Index, but the main objective of the QQQ is still to track the price and performance of the underlying index.

Composition of the Nasdaq 100 Index

The Nasdaq 100 Index is composed of assets in various sectors, excluding financial services. A large portion of the index covers the technology sector, which accounts for 54% of the index’s weight. The next largest sector is consumer services, represented by companies like restaurant chains, retailers, and travel services. These stocks account for nearly a quarter of the cap weight thanks to the continued growth of retail giant Amazon (AMZN). Rounding out the index is healthcare, industrials, and telecommunications. The diversity of companies included in the Nasdaq 100 helped drive strong returns for the past two decades.

Criteria for Eligibility

For inclusion in the Nasdaq 100, index securities must be listed exclusively on a Nasdaq exchange. This can include common stocks, ordinary shares, American depositary receipts (ADRs), and tracking stocks. Twenty-seven countries are tied to companies represented in the index. Other grounds for inclusion comprise market capitalization and liquidity. While there is no minimum requirement for market capitalization, the index itself represents the top 100 largest companies listed on the Nasdaq.

Nasdaq 100 Index Options

The QQQQ is the original ticker symbol for the Nasdaq 100 Trust, an ETF that trades on the Nasdaq. This security offers broad exposure to the tech sector by tracking the Nasdaq 100 Index, which consists of the 100 largest and most actively traded non-financial stocks on the Nasdaq. It is also known as “cubes” or the “quadruple-Qs” and is now listed under the Invesco QQQ Trust or QQQ, its current ticker symbol.

BREAKING DOWN QQQQ

The QQQQ is now traded through the Invesco QQQ Trust, but it still tracks the Nasdaq 100, a stock index of the 100 largest companies listed on the Nasdaq by market cap. The Nasdaq 100 index comprises companies from almost all sectors except for financial services. These non-financial sectors include retail, biotechnology, industrial, technology, health care and others. It provides a good investment choice for investors seeking exposure to the tech sector, because many of the largest companies listed on the Nasdaq are blue chip tech stocks such as Google (GOOGL), Microsoft (MSFT), and Qualcomm (QCOM).

Requirements for Inclusion in the Invesco QQQ Trust

All companies in the Invesco QQQ Trust must be part of the Nasdaq 100 and have to be listed on the Nasdaq exchange for at least two years. Some exceptions are made for companies listed for one year but have extremely high market capitalizations. All stocks need to have an average daily trading volume of 200,000 and are required to report earnings both quarterly and annually. Companies with bankruptcy issues are omitted from the Invesco QQQ Trust.

Breakdown of the Invesco QQQ Trust

The Invesco QQQ Trust is tech-heavy and has a total of 54.72% allocated to the technology sector. Consumer cyclicals are the next highest sector, with a 21.27% allocation, and the health care sector rounds out the top three with a 13.52% allocation. All other sectors have less than a 10% allocation within the Invesco QQQ Trust, with consumer non-cyclicals, industrials and telecommunications rounding out the top six sectors represented.

It’s no surprise then that eight of the Invesco QQQ Trust’s top 10 company holdings are technology firms. Notable technology holdings include Apple, Microsoft, Amazon, Google, Facebook, Intel, and Cisco. It’s worth noting the Invesco QQQ Trust tracks a limited number of stocks compared to other Nasdaq ETFs. For example, the popular Nasdaq Composite Index (IXIC) tracks every stock listed on the Nasdaq, including financial services. The IXIC tracks more than 3,000 public companies.

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