After sprinting 95% higher since the start of 2023, the Nasdaq 100 should be called the Usain Bolt of indexes. In December, it hit 22,000 for the first time, a level it currently remains near (21,326).
This means an investor who put five grand into a fund that tracks the index at the start of 2023 would now have nearly £10,000. That’s an incredible result — it’s not often an index almost doubles in just two years!
Why’s this happened?
The Nasdaq 100’s made up of the largest non-financial firms on the tech-focused Nasdaq exchange. So when tech stocks sold off heavily during the 2022 bear market, the index crashed 33%.
Therefore, this hypothetical person would have timed their early 2023 investment perfectly. That’s when investors were anticipating lower interest rates due to easing inflation. Consequently, the US stock market was just starting to recover.
Also in late November 2022, generative artificial intelligence (AI) bot ChatGPT was launched. This sent shockwaves through the tech world, provoking deep-pocketed companies to make massive capital investments for fear of being left behind by this revolutionary technology.
AI-related stocks, especially chipmaker Nvidia, have since driven the Nasdaq 100 to the moon.
How to invest?
To get involved, investors could consider buying something like the Invesco EQQQ Nasdaq 100 ETF (LSE:EQQQ). The share price is up around 145% in five years!
This exchange-traded fund (ETF) holds non-tech names like Costco and Starbucks. However, 51% of it is in the information technology sector. And nearly a third’s now in just four mega-cap stocks: Apple, Nvidia, Microsoft, and Amazon.
While these are all fabulous companies, this high level of concentration presents risk. If a couple of them suddenly encounter problems, or there’s a tech sector meltdown, the Nasdaq 100 would underperform, at least for a while. Remember the 33% slump in 2022..?
And with the growth-oriented index yielding a meagre 0.4%, there wouldn’t be much income to help soothe the pain.
The index’s high valuation is certainly worth noting too. It currently has a price-to-earnings (P/E) ratio of 32, which makes this raging bull market one of the most expensive in decades.
This probably explains why billionaire investor Warren Buffett spent last year selling down some of his top holdings, including Apple. In total, he unloaded $133bn worth of shares in the first nine months of 2024!
A simple strategy to consider
Due to the high starting valuation today, I don’t expect the Nasdaq 100 to perform anywhere near as strongly over the next five years. But I think it will still do well, given the ongoing technological revolution and the high growth potential of its innovative constituents.
I hold a few Nasdaq stocks in my portfolio, so I’m not looking to get more exposure via an ETF. But for those looking to invest, I’d say it might be better to consider using a pound-cost averaging strategy.
This would involve investing at regular intervals, such as monthly or quarterly, regardless of market conditions. It would smooth out the purchase prices, thereby helping to minimise the risk of making a single large investment at a market peak. Nobody wants to do that!
This post was originally published on Motley Fool
