The NASDAQ Indexes and The Measurement of Growth
By John Jacobs
Executive Vice President
NASDAQ’s Worldwide Marketing and Financial Products
The NASDAQ Indexes are among the world’s most frequently consulted indicators of capital markets. Like the Dow Jones Industrial Average or the S&P 500, the NASDAQ indexes are consulted, broadcast, and reported on hundreds of millions of times each day around the world as investors try to gauge the direction and meaning of daily trading activity.
But the NASDAQ indexes are unique in a crucial respect. While the Dow Jones Industrial Average and S&P 500 are respected businesses that have established a measurement system for stock market activity, the NASDAQ indexes are a consolidation of the actual data the market itself generates at any given moment. They provide a real, unfiltered picture of a stock market in motion.
The NASDAQ Composite Index, launched in 1971, is perhaps the best example of what we believe a broad-based index of the market ought to be. Today the Index is comprised of over 3,000 securities - more than any other stock market index in the U.S. [by virtue of including] every equity-like security listed exclusively on the NASDAQ Stock Market (these could be a common stock, and ADR, a Limited Partner Interest, ordinary shares, a REIT, Shares of Beneficial Interest (SBIs), or a tracking stock). But because of the nature of stocks that have traditionally been listed on NASDAQ – innovative, research- and technology-driven -- the NASDAQ Indexes have become an important barometer of economic growth.
The creation of the NASDAQ Composite Index and the many indexes that we have created all reflect NASDAQ’s broader outlook and philosophy. From its inception, NASDAQ has championed ?? a competitive market model that relied on the most sophisticated technology to provide investors open and transparent information about market data that could be readily accessed by both institutional and individual investors alike. The goal was to create a computer-driven marketplace without the biases of “inside information” to which a specialist system is so susceptible.
Similarly, the NASDAQ Composite Index was designed to rely on technology to create an open and transparent gauge of the market. Unlike other major indexes, the NASDAQ indexes do not rely on a committee of experts to arbitrarily include which stocks shall be represented in its measurement model. Instead, the stocks are selected based on the clear definition of the index: the NASDAQ Composite includes all the NASDAQ listed stocks; the NASDAQ-100 includes the 100 non-financial largest stocks listed on the exchange; and so on.
Looking at the NASDAQ-100 Index, for instance, there are no secret selection criteria and no unanticipated changes to the Index. The rules for inclusion are clear and available to public through the NASDAQ.com web site. Each year NASDAQ ranks its companies on the same date, using the same publicly available criteria and data. Anyone with a computer access to the Internet and the patience to go through the numbers, can replicate the NASDAQ-100 rules- based Index and predict which companies will remain in the Index and which will not. The investor, not committees, makes the decision.
The NASDAQ Indexes
Today NASDAQ has 14 Major indexes. I briefly describe the more prominent ones below:
• The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market.
• Today, the NASDAQ Composite includes over3,3000 companies, more than most other stock market indexes. Because it is so broad-based, the Composite is one of the most widely followed and quoted major market indexes.
• The NASDAQ-100 Index includes 100 of the largest domestic and international non-financial companies listed on The NASDAQ Stock Market based on market capitalization.
The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology.
It does not contain financial companies including investment companies. The NASDAQ-100 Index is calculated under a modified capitalization-weighted methodology.
• The NASDAQ Financial-100 Index. First offered in 1985, includes 100 of the largest domestic and international financial organizations listed The NASDAQ Stock Market based on market capitalization. The Index contains bank and savings institutions and related holding companies, insurance companies, broker dealers, investment companies and financial services.
• The NASDAQ Biotechnology Index. Since its introduction in 1993, has given investors access to companies that are classified according to the FTSETM Global Classification System as either biotechnology or pharmaceutical which also meet other eligibility criteria.
• The NASDAQ Bank Index contains all types of banks and savings institutions and related holding companies, establishments performing functions closely related to banking, such as check cashing agencies, currency exchanges, safe deposit companies and corporations for banking abroad.
NASDAQ also offers the following indexes: NASDAQ National Market Composite Index, NASDAQ Computer Index, NASDAQ Industrial Index, NASDAQ National Market Industrial Index, NASDAQ Insurance Index, NASDAQ Other Finance Index, NASDAQ Telecommunications Index, NASDAQ Transportation Index, and NASDAQ Canada Index.
All NASDAQ indexes are marketvalue-weighted except for the NASDAQ-100 Index, which is weighted using a modified market capitalization method. The representation of each security in index is proportional to its last sale price times the total number of shares outstanding, relative to the total market value of the respective index.
Today, over 400 NASDAQ index-based products are available in 27 countries. These include ETFs, options, futures, CDs, warrants and a host of other products all linked to NASDAQ indexes. Today NASDAQ is the only market to develop and license indexes and sponsor and list financial products based on those indexes.
The Rise of ETFs
The creation in 1993 of the first exchange-traded fund (ETF), SPDRS, benchmarked to the S&P 500 Index, was a watershed innovation for investors. It meant that broad-based and sector-focused indexes were not only yardsticks for market activity, but they could create new categories of investment products for the public.
The advantages of an ETF are numerous. ETFs offer the advantage of trading an index portfolio with the ease of stock trading. Investors can purchase ETF shares on margin, short sell shares, or hold for the long term. Investors also achieve market exposure consistent with the index on which they are based, through one security. ETFs are also designed to be cost efficient, because they are based on an index rather than being actively managed.
The popularity of ETFs is likely to grow and this can be attributed to the benefits of indexing that investors have seen over the bear or bull markets. ] (this is speculation and to date, there is no irrefutable evidence proving that etfs have benefited from the mutual fund scandal). Because a basic requirement of a successful index fund is that it provide investors with continual streams of accurate, timely information that promote predictable outcomes for the investor, the Nasdaq indexes were an obvious basis for index funds.
QQQ and Other Financial Products
NASDAQ has promoted the use of its indexes by creating a full set of products linked to them. The most popular product is QQQ, an ETF designed to correspond to the price and yield performance of the NASDAQ-100 Index. QQQ offers investors a simple way to diversify their portfolios with the opportunity to buy NASDAQ-100 companies in a single security. Lainched in 1999, it become today the most actively traded ETF in the world. . It is also the most actively traded listed security in the United States with more than 96 million shares traded daily in the first quarter of 2004 . In just five years, it’s attracted more than a million investors. Indeed, QQQ has grown significantly since its inception: from $14.8 million at the start of the NASDAQ-100 Trust on March 5, 1999 to $22.8 billion in assets as of March 31, 2004 .
With each passing year, NASDAQ works to introduce new index-linked financial products in order to further strengthen the ability for the public to pursue diversified index investing.
• ONEQ is an ETF launched in 2003 by Fidelity Investments. Based on the NASDAQ Composite Index, it seeks to provide investment returns that correspond to the price and yield performance of the Index. ONEQ uses a sampling technique based on quantitative procedures to create a portfolio of securities listed in the Index that possesses a similar investment to the entire Index.
• In 2002, NASDAQ sponsored a series of four ETFs known as BLDRS that are based on The Bank of New York’s relevant ADR IndexesSM. These are real-time indexes tracking publicly-traded Depositary Receipts of non-U.S. companies in a particular geographic region or market. NASDAQ serves as a listing market for BLDRS.
Each BLDR’s portfolio represents an entire Bank of New York relevant ADR index and has the benefit of low cost, transparent investing, liquidity, diversity, and The Bank of New York’s expertise as a world leader in depositary receipt programs.
• 2002 was also marked by the introduction of EQQQ, The NASDAQ -100 European Tracker, the European version of QQQ. Designed for European investors, it is based on the NASDAQ-100 Index, which is composed of 100 largest non-financial companies listed on NASDAQ.
• iShares NASDAQ Biotechnology Index Fund (IBB) launched in 2001 by BGI tracks the NASDAQ Biotechnology Index throughout the trading day; the fund represents the largest and most actively traded NASDAQ biotechnology companies.
The Next Stage: the Globalization of NASDAQ Indexes
The major NASDAQ indexes have already taken their place as a benchmark looked at around the world as an indicator of the American economy. [Wayne, please check the grammar in the first sentence] The next stage is to globalize our system.
In the fall of 2003, NASDAQ announced that it would reclassify its over 3,300 listed companies according to the FTSE Global Classification System (GCS) in all NASDAQ indexes. Working with the global index provider, FTSE Group, each NASDAQ-listed company will be analyzed and reclassified according to the globally recognized FTSE system. This move will enable easier analysis of NASDAQ stocks by investors worldwide, and will simplify sector analysis.
The move also reflects NASDAQ indexes’ growing prominence in foreign markets. As of March 2004, NASDAQ had 309 international security listings representing 36 nations.
With broader exposure around the world and a more diverse set of investors, NASDAQ’s product developers have started analyzing the NASDAQ indexes to find sub-indexes and sectors that meet the demand of broader investor groups. Whatever products may emerge, one can be certain that they will be based on the same open architecture that has defined the existing NASDAQ products. The goal, as always, has been to deliver to investors the most accurate and most timely information about the marketplace – and allow them to invest knowing they have the best data available.