What Does the Nasdaq Composite Index Measure?

What Is the Nasdaq Composite Index?

The Nasdaq Composite Index is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange. It is a broad index that is heavily weighted toward the important technology sector. The index is composed of both domestic and international companies. The Nasdaq Composite Index is a highly-watched index and is a staple of financial markets reports.

Understanding the Nasdaq Composite Index

The Nasdaq Composite Index includes all equity securities listed on the Nasdaq. They include common stocks, ordinary shares, American depositary receipts (ADRs), units of real estate investment trusts (REITs), and publicly traded partnerships, as well as tracking stocks,

Stocks that aren't eligible for inclusion are the securities of closed-end funds, exchange-traded funds (ETFs), preferred shares, rights, warrants, convertible debenture securities, or other derivatives.

The Nasdaq Composite includes the stocks of companies headquartered in the U.S. International companies are also included in the index, which is in contrast to the S&P 500 Index and the Dow Jones Industrial Average (DJIA)—the two other most frequently cited market benchmarks.

Nasdaq Composite Index Methodology

The Nasdaq Composite Index was launched on Feb. 5, 1971. It uses a market capitalization weighting methodology. The index's value is calculated by summing the market capitalization of its components based on the current price of the constituents. This total is then adjusted by a constant index divisor. The index had a value of 100 when it was first established.

The index is constantly calculated throughout the trading day. Its value is disseminated once per second from 9:30 a.m. to 5:16 p.m. ET. The closing value of the index may change up until 5:15 p.m. ET as a result of corrections to the last reported price for index components.

Two versions of the Nasdaq Composite Index are calculated. The first is a price return index and the other is a total return index. The total return index assumes the reinvestment of cash dividends distributed by companies included in the index.

Changes in the share price as a result of corporate actions such as stock splits, stock dividends, or spinoffs are tallied on the action's ex-date. Changes in total shares outstanding following conversions, stock repurchases, secondary offerings, or acquisitions are usually reflected 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.

Nasdaq Composite Index Composition

As noted above, the Nasaq Composite is made up of more than 2,500 different companies that trade on the Nasdaq. The industry weighting of the Nasdaq Composite Index based on the included stocks was as follows as of July 10, 2023:

The 10 most heavily weighed securities in the Nasdaq Composite Index as of March 31, 2023, were:

1. Apple (AAPL): 13.79%
2. Microsoft (MSFT): 11.44%
3. Amazon (AMZN): 6.04%
4. NVIDIA (NVDA): 4.72%
5. Tesla Inc (TSLA): 3.75%
6. Alphabet Class A (GOOGL): 3.21%
   
7. Alphabet Class C (GOOG): 3.21%
8. Meta Platforms (META): 2.87%
9. Broadcom (AVGO): 1.63%
10. Pepsico (PEP): 1.15%

Nasdaq Composite Index Market Performance

The Nasdaq Composite Index produced an annualized return of 14.66% over the 10 years through July 7, 2023.

Its 9.1% decline in Q1 2022 was the Nasdaq Composite's worst since the 14.2% loss in Q1 2020 as the COVID-19 pandemic struck. The Nasdaq's 12% drop in April 2022 was its worst since the 17.4% decline in October 2008 at the height of the global financial crisis.

The Nasdaq Composite met the common definition for a bear market in mid-March of 2022 by dropping more than 20% from its Jan. 3, 2022 peak. From there, the index saw a strong relief rally that roughly halved its losses by the start of April, then gave back all those gains over the next month.

Because the Nasdaq Composite is dominated by the historically volatile technology sector, index performance tends to be more volatile than that of the S&P 500 or the Dow Industrials.

The Bottom Line

The Nasdaq Composite Index rose to prominence thanks to the rapid growth of the most successful companies with Nasdaq-listed stocks, including Microsoft and more recently Apple and Alphabet.

The flip side of such ling-term success in an index based on market capitalization is that the Nasdaq Composite is very top-heavy. The top five companies (and six stocks including both traded classes of Alphabet's shares) account for more than 40% of the Nasdaq Composite's index weight.

Moreover, high-growth stocks prevalent in the index tend to be more economically sensitive and more volatile as a result. When the market does well, the Nasdaq Composite can be a standout: it gained 43.6% in 2020 despite a rough March, after a 35.2% surge in 2019. When the going gets rough, you get its 40.5% loss in 2008—or the first four months of 2022.