Why Do We Care About the Nasdaq?

Our national fascination with this relic has to stop

   

As American markets have kicked into ludicrous speed this year, every financial media site has pelted readers with three equally billed pieces of information:

  1. The S&P 500 is at all-time highs.
  2. The Dow Jones Industrial Average is at all-time highs.
  3. The Nasdaq is at 13-year highs.

Some market pundits (including myself) bristle at the widespread celebration of this second point, and are quick to note that the Dow has become increasingly irrelevant as a well-rounded gauge of American business … because of the S&P 500, no less. It’s lacking in certain industries and entirely bereft of others, which is bound to happen when you’re a loath-to-change collection of 30 stocks vs. a frequently shifting mass of 500.

The problem is, while we’re focused on that bit of sillynannery, we’re forgetting to ask ourselves another topical question:

“Why the hell do we care about the Nasdaq Composite, either?”

Heresy, I’m sure. But seriously — if we’re going to kick around indices for pointlessness, how are we not at least putting a foot on the Nasdaq?

The Dow Jones Industrial Average grew into its current ubiquity because, at one point, it was thought to be a good reflection on Wall Street’s part of how the American economy was humming. Its current shortfalls aside, the DJIA served this purpose once. The S&P 500 was promoted to the same league because it performed the same task.

The Nasdaq? It’s hard to say.

For pretty obvious reasons, many associate the Nasdaq with the tech market. Technology stocks make up roughly half of the composite’s weight, led by some of the biggest names on Wall Street, let alone tech, including Apple (AAPL), Google (GOOG) and Amazon (AMZN).

Of course, if we’re really interested in taking tech’s temperature, why not focus on the Technology SPDR (XLK), which is 77% weighted in tech stocks, with another 18% or so split between communication and financial services … but considering that includes stocks like AT&T (T) and Visa (V) — a payment processor, not a bank — you can see how that still has a clearly tech slant. Or better yet, the iShares U.S. Technology ETF (IYW), which is more than 99% weighted in pure-play tech stocks.

So if The Nasdaq isn’t a tell on technology, then what?

It’s certainly not another broad market indicator. It overlaps with the S&P 500 in offering mostly large-cap exposure, for one, and it’s not nearly as balanced. The Nasdaq is weighted by market cap, and the largest companies in the composite are overwhelmingly tech stocks — thus, you get the aforementioned heavy tech tilt, and a more distorted picture of the American markets.

Also, before you argue that the Nasdaq has far more components at 3,000-plus, you can also get your four-digit-holding jollies and sector balance, too, via the Wilshire 5000 Total Market Index, which (despite what its name might suggest) consists of roughly 3,700 U.S. stocks.

The table below paints the picture:

NasdaqWeightings Why Do We Care About the Nasdaq?

“But the Nasdaq isn’t just a U.S.-based index,” you say. “It has international holdings, too!”

True, but consider this: Based on the Fidelity Nasdaq Composite Index Tracking ETF (ONEQ) — which tracks the numerical majority (1,857) of the Nasdaq Composite’s stocks, and the vast majority of the weight — the breakdown is roughly 95/5 in favor of the red, white and blue. So don’t kid yourself and call the Nasdaq a global pulse-taker, either.

The Nasdaq doesn’t even measure up the S&P 500 and Dow in the “it’s just been around for a long time” arena, for crying out loud. The Nasdaq Composite came to life in 1971. S&P 500? ’57. And the DJIA? 1885.

And yet, despite no true identity, this hobo-chili index makes the evening news while benchmarks like the Russell 2000 — the small-cap grouping that actually has a widely recognized purpose of gauging investor risk tolerance — don’t even merit the popularity podium?

Give me a break.

As far as I can figure, the only driver behind the Nasdaq’s media prevalence at this point is the same driver behind many of our bad habits — laziness. We’ve said it for 20 years, so what’s another 20? We’re all comfortable, so why adjust the recliner, right?

But hey … at least we can all hear about the Nasdaq’s daily exploits and know in our hearts that some tech stocks, a few biopharms and Starbucks are all doing A-OK.

Kyle Woodley is the grouchy Deputy Managing Editor of InvestorPlace.com. As of this writing, he was long T and the S&P 500 via the Vanguard S&P 500 ETF (VOO). Follow him on Twitter at @IPKyleWoodley.


Article printed from InvestorPlace Media, http://investorplace.com/2013/07/why-do-we-care-about-the-nasdaq/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.