Talk Your Book: A Short History of the Nasdaq 100
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Today's Animal Spirits Talk Your 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 Batnick 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 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 it's down 500 points. You don't really talk about the S&P or the NASDAQ 100 in terms of points. So 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 800s, 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 21,000s now. So 800-ish 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. 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&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? It entered the chat. I think that it kicked the door down in the 2020s for sure. I'm just saying like specifically on his show, but yes, in a broader sense. 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&P? And now-

There it's, it's nothing to hear people say, why wouldn't I just own the NASDAQ, the NASDAQ 100? Yeah. So again, it's, it's become a core. 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 we're 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 Merricks, who's a Senior Director at Index Research and Development. And they kind of gave us a lot of the background on the index. I think 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 index.

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 things are just more mature in that space now than they were. And so anyone predicting a dot-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. Thank you.

So, 40th anniversary for the NASDAQ 100. It 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? 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 kind of simple in its rules, right?

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, 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. What was the thinking behind non-financials at the time? 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, it's

kind of sister index that has taken on a life of its own in terms of why it was originally created.

So Wall Street punditry, whenever they're talking about like 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 did that happen?

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 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, you know, 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

for about 30 years now. So it is tech heavy. There's no way around it, but we prefer using the moniker, you know, 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 healthcare sector.

Those three together give you about 80 to 85 percent of the index exposure any given quarter, any given year.

And so making it onto the list, it's really not that hard. It's not like 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? As long as you are a non-financial company. Right. Okay. 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. Like what are those companies? Pepsi. Pepsi.

Is Pepsi in there or not? 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 said, look, we want in. Right. 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 the 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. 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?

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, you know, 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 spinoff, 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 US, I think eight largest companies globally are all NASDAQ listed. They're all part of the NASDAQ 100. Basically, take MAG7 plus 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, OK, if over the past decades you are one of these companies and your decision to list on NASDAQ versus 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 percent for any one decision. But to get eight heads in a row, it's less than 0.5 percent 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 the new economy sectors these days, tech and healthcare and consumer, they are happening at NASDAQ. So they want that association. 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. Like, how did, 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?

I think it started with, you know, 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?

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, the 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. One of my favorite aspects, it's so simple yet I think such a powerful force 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

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 to 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 an old stock drops out?

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, OK, you're 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, two 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 100 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

um but most of the activity you'll see um in december 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 you know stocks within the in the index like nvidia over the course of a year the percentage waiting that they take up changes based on their actual price value as well and then secondly mark mentioned that companies

moved from NASDAQ to NYSE. But importantly, companies moved 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. So an exciting little rivalry between you and them. But also it

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

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'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 a kind of 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. And 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. So 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 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 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?

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. Yeah, 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 100 largest on the exchange.

ex-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 the biggest holdings down every single quarter. If you're over 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 regularly sort of getting capped down as a group, if not quarterly, then annually when we have that capping process run. 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 is 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 enter the index or how does that work? 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 out, get added 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? 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 where a company drops out, delists, or is acquired, and then there's an opening for another company to come in. So it's seasoning plus moment in time to be added. I think that's a good point.

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, the 80s things took off and then really ramped up in the 90s as this thing became much bigger. And then you had the dot-com bubble burst. And

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 whatsoever.

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. 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 of 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, you know, given the fact that you have this anchor, right, with the eight largest companies, top 10 around 50 percent,

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? 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 U.S. So if you want to...

I was 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.

an interesting stat I didn't realize. So you're saying 15% in 1999 of the S&P was a NASDAQ 100, now it's more like 50% or whatever. That's very interesting. By market cap, yeah. 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.

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

It is not. It is a financials company as per the sector classification system that we use. So they must not be happy with that exclusion. I mean, I'm sure they're like, we're a technology company. We are not the ones who determine the classifications. We use the ICB, which is produced by Footsie Russell. All right. So they could take it up with somebody else. But there's no, but other than that, it's like, you guys aren't like a...

anti any particular industry other than of course it's not a you know there's no financials in the index but outside of that you've got paypal in there right paypal's paypal still classified as an industrials company because they're sort of okay payment infrastructure arena right so paypal has a decent crypto business they let you buy and sell a bunch of crypto on there now you've got micro strategy paypal's considered an industrial

For now, at least, yes. It's still considered an investment. So micro strategy is classified as what?

It's a tech company. They've been a tech company for like 30 years. If you look at their revenue, right, how they make revenue, it's from software. It's from data visualization type software and other things. So for now, they're tech and they're in. Yes. Again, the classification is based on ICB rather than anything arbitrary from NASDAQ.

That is interesting. I never knew the non-financial piece. So it seems like in 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 firmly became 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 latest cycle? No way. I'll answer for you guys. But like, 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 tight, 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 now. They are just fundamentally very different. You know, the NASDAQ 100 is 100 of the largest non-financial stocks. It represents something. The composite is 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.

How many companies in the NASDAQ composite then that you take these 100 out of? What's the total number on the NASDAQ overall ballpark? I believe it's around 4,000. 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, 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 were 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? 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 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 U.S. 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, OK, give me R&D as a percent of total sales, total revenue. It's around an order of magnitude higher intensity on R&D in the NASDAQ 100 versus rest of the S&P, rest of whatever benchmark you use to get U.S. large cap exposure.

We dig into that even further, though, to kind of reinforce that story and say, OK, what's all this R&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 sell 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. So to us, it's not just sort of a buzzword of like, yeah, we think these companies have been innovative 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?

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? You could send that. What do you think, Mark? Send them to NASDAQ.com. NASDAQ.com. You'll find it there. All right. Mark, Emily, thank you very much for the time today. Thanks very much. Thank you. Pleasure to be here.

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 at animalspirits.compoundnews.com.