• Introduction
• Market-Capitalization Weighted Index
• How Market-Capitalization Weighting Affects the Index
• Top Weighted Stocks in the NASDAQ Index

The NASDAQ index was established in New York City in February of 1971 and is the second largest stock exchange in the world by total market capitalization. The name NASDAQ itself is an acronym that stands for National Association of Securities Dealers Automated Quotations. The Automated Quotations part of the acronym is key because in 1971, the NASDAQ became the world’s first fully electronic market. At the end of 2021, the NASDAQ had a total market cap of $19 trillion.

Many people do not realize that the NASDAQ is owned by the NASDAQ inc company which trades on the exchange under the ticker symbol (NASDAQ:NDAQ). In total, the NASDAQ has over 3,700 stocks listed, many of which are in the information technology sector. Otherwise known as the tech sector, this segment makes up more than half of the total value of the NASDAQ exchange. In fact, more than 40% of the NASDAQ exchange is weighted by a handful of mega-cap tech stocks.

Unlike the Dow Jones Industrial Average which is price-weighted, the NASDAQ and the S&P 500 are both market-capitalization weighted. This means that the larger the market cap a company has, the higher weight it holds within the index. A prime example of this is Apple (NASDAQ:AAPL), the most valuable company in the world by market cap. Apple has by far the largest weighted allocation in both the NASDAQ and the S&P 500. Apple is also a component of the Dow

Jones, but because its price is not as high as other stocks, it has a lower weighting.

What are the pros and cons to each specific method of index weighting? Each has its advantages. As we’ve seen in a bear market, market-capitalization weighted indices suffer if the largest weighted companies fall. This is not as obvious in a price-weighted index like the Dow Jones. On the flip-side, market–cap weighted indices tend to see higher gains when their largest constituents do well. 

Consider the 5-year performance of the Dow 30, the NASDAQ Composite, and the S&P 500 index. Obviously there is overlap amongst all three with Apple and Microsoft (NASDAQ:MSFT) holding major allocations in each index. During that time period, the Dow Jones has gained about 48%, while the S&P 500 has climbed by 61%, and the NASDAQ an impressive 90%.

You might be wondering how the NASDAQ is impacted by a rise or fall in a company’s market cap. In the clearest sense, the larger the market cap is, the more it will weigh on the NASDAQ’s performance. A 5% drop by Microsoft will have a considerably higher impact than a 10% fall in a company like DocuSign (NASDAQ: DOCU) or Okta (NASDAQ:OKTA). It’s not because Microsoft is that much better of a company, but its market cap trounces those other two stocks, and it holds a near 10% weight in the index.

Is it a better system of weighting than price-weighting indices like the Dow Jones? Each system has its own merits. For obvious reasons, price-weighted exchanges have more movement in the individual weight of the component stocks. Market-capitalization weighted indices definitely do not see as much movement, especially at the top where the largest companies generally continue to grow. Price-weighted is certainly an easier system to understand but let’s just say the best companies don’t always have the most expensive stocks, which is the single most apparent flaw in the Dow Jones index.

The NASDAQ is home to some of the largest companies in the world by market cap. The stocks at the top of the list should come as no surprise to anyone, especially considering the 51% or so weight that the information technology sector has. Here are the top ten holdings in the NASDAQ by weight.

Articles Section

• Personal Finance Articles
• Residential Lending Articles
• Financial Planning Articles
• Small Business Articles
• Dividends Articles