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 3,700 stocks listed on the Nasdaq stock exchange. As a broad index heavily weighted toward the important technology sector, the Nasdaq Composite Index has become a staple of financial markets reports.

Understanding the Nasdaq Composite Index

The Nasdaq Composite Index includes all equity securities listed on the Nasdaq Stock Market, including common stocks, ordinary shares, American depositary receipts (ADRs), units of real estate investment trusts (REITs) and publicly traded partnerships, as well as tracking stocks, Not 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 abroad, in contrast with the S&P 500 Index and the Dow Jones Industrial Average, the two other most frequently cited market benchmarks.

Nasdaq Composite Index Methodology

The Nasdaq Composite Index uses a market capitalization weighting methodology. The index's value is calculated by summing the market capitalization of the index components based on the stocks' current price. This total is then adjusted a constant index divisor.

The index was launched on Feb. 5, 1971 with an index value of 100.

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

Two versions of the Nasdaq Composite Index are calculated: a price return index and 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

The industry weighting of the Nasdaq Composite Index based on the included stocks was as follows as of April 29, 2022:

• technology - 51.11%
• consumer services - 16.06%
• consumer goods - 8.8%
• health care - 7.74%
  
• financials - 7.43%
• industrials - 5.52%,
• oil and gas - 1.02%
  
• utilities - 0.91%
• telecommunications - 0.90%
  
• basic materials - 0.52%

The 10 most heavily weighed securities in the Nasdaq Composite Index as of March 31, 2022 were:

1. Apple Inc (AAPL) - 12.25%
2. Microsoft Corp. (MSFT) - 9.93%
3. Amazon.com Inc. (AMZN) - 7.13%
4. Tesla Inc (TSLA) - 4.79%
5. Alphabet Class C (GOOG) - 3.79%
6. Alphabet Class A (GOOGL) - 3.59%
7. Nvidia Corp. (NVDA) - 2.93%
8. Meta Platforms (META) - 2.21%
9. Broadcom Inc. (AVGO) - 1.11%
10. Costco Wholesale (COST) - 1.1%

Nasdaq Composite Index Market Performance

The Nasdaq Composite Index produced an annualized return of 15.4% over the 10 years through April 28, 2022, according to Morningstar.

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.