Key Points
- The Nasdaq Composite and the S&P 500 are both stock market indexes, measures used to track the performance of select baskets of assets.
- The Nasdaq is primarily made up of both international and domestic technology stocks.
- The S&P 500 is a measure of the top 500 companies in the United States when organized by market capitalization.
- While companies included on the Nasdaq tend to have higher market capitalizations than companies on the S&P 500, the S&P 500 is usually considered more stable due to the volatile nature of the tech industry.
The Nasdaq and the S&P 500 are both major measures used to track the health of specific segments of the economy. The Nasdaq is a global electronic marketplace for buying and selling securities best known for its higher concentration of tech stocks. Its index, the Nasdaq Composite, is used as a benchmark to compare the performance of technology and biotech stocks. The S&P 500 is a competing index that includes a wide range of sectors but limits inclusions to the largest U.S. stocks.
While both indexes serve similar functions, the best investment for your portfolio may vary depending on your risk tolerance and investing timeline.
What Are Stock Indexes?
Both the Nasdaq and the S&P 500 are market indexes, important tools used to track the performance of a group of assets. Stock market indexes consider only a select “basket” of stocks, providing investors with a quick glimpse into how that group of assets is performing over time and on any particular day.
Stock indexes are crucial tools for comparing investments against one another, serving as a benchmark that tracks the average movement within an industry or group of stocks. For example, imagine that you’re a tech investor and you want to know if returns on recent stock investment are beating what you’d see if you’d invested the same capital into the general tech market. By comparing your rate of return to the average return of a tech-focused index like the Dow Jones U.S. Technology Index, you can quickly see if your investments are beating the general movement of the market.
What’s the Difference Between Nasdaq and the S&P 500?
The primary difference between the Nasdaq Composite Index (“the Nasdaq”) and the Standard & Poor’s 500, (“S&P 500”) is the stocks that make up the indexes. While both indexes measure a specific segment of the market, the type of stocks that qualify for inclusion vary primarily on the nature of the business and its size.
Market Composition
The first and most pronounced difference between the S&P 500 and the Nasdaq are the types of stocks that make up the “basket” mentioned above. The Nasdaq focuses primarily on technology-driven companies, with the Nasdaq Composite Index including more than 3,000 individual stocks that qualify for inclusion on the Nasdaq exchange. The Nasdaq includes both internationally and domestically based companies.
The S&P 500 index is largely considered to be a general measure of the performance of the U.S. economy as a whole. The “500” in the name refers to the number of stocks included in the index, which is composed of the top 500 largest companies in the United States. Unlike the Nasdaq, the S&P 500 features stocks in sectors like technology, healthcare, finance and consumer goods
Inclusion Criteria
There are a few variations in the stocks included in both indexes. The Nasdaq is made up of all stocks operating on the market, which is primarily tech-based. If a company meets the qualification criteria for listing on the Nasdaq exchange, it qualifies for inclusion in the Composite index.
The S&P 500 is more strict in its inclusion criteria. While it includes companies from a wide range of sectors, the index is only representative of the top 500 domestic companies when measured by market capitalization. It includes stocks from both the Nasdaq exchange and the New York Stock Exchange, but does not consider international companies like the Nasdaq Composite does.
Market Cap Variation
The Nasdaq Composite is made up primarily of tech companies, which tend to feature higher market capitalizations on average than companies in other sectors. Many of the top stocks included on the Nasdaq (like Apple and Microsoft) are also major components of the S&P 500. While the S&P 500 categorizes inclusions and weighting by market capitalization, it features large-cap, medium-cap and a few small-cap stocks.
What Are the Similarities Between Nasdaq and the S&P 500?
Both the Nasdaq and the S&P 500 are major stock market indexes used to track and measure the performance of a basket of representative stocks. While the criteria for inclusion might vary between them, both are used as benchmarks to compare the performance of a smaller or individual asset to the returns of some segment of the overall market.
Stock market indexes are also notable for their association with exchange-traded funds (ETFs). ETFs are investment funds that trade on the stock market in the same way as individual shares of stock. Most of the world’s largest ETFs track some form of stock index. For example, the Vanguard S&P 500 ETF (NYSE: VOO) is an ETF that includes assets in accordance with the composition of the S&P 500. The goal of these funds is to replicate the performance of the index, and both the Nasdaq and S&P 500 are the basis for multiple ETFs.
Is It Better to Invest in the Nasdaq Composite or the S&P 500?
The Nasdaq and the S&P 500 serve different purposes to investment analysts and investors alike. The best investment choice for your needs will vary depending on how long you plan to stay in the market and your overall portfolio makeup, with the S&P 500 usually being considered the more conservative choice.
Risk Tolerance
Between the Nasdaq and the S&P 500, the Nasdaq is usually considered the less stable option. The index is driven primarily by tech stocks, which tend to be classified as growth stocks. Growth stocks are companies that reinvest most of their profits back into growth and new asset development, which give them the potential to grow long-term.
While these stocks usually show higher potential for return, they’re also more volatile than larger, more established companies — like those that make up the S&P 500. If you’re looking for a less volatile investment option or have a lower risk tolerance, you may want to opt for the S&P 500.
Time Horizon
If you’re investing on a longer time frame, you may want to consider investing more heavily in the Nasdaq. The Nasdaq is made up of a high number of growth stocks, which tend to be more volatile in the short-term when compared to blue-chip options. If you’re investing for a more conservative goal (like a retirement that’s coming in a few years), you may want to invest more heavily in the S&P 500.
Diversification Needs
Diversification is the idea that you should invest in multiple sectors, companies and types of assets to reduce your financial risk in the long-term. The S&P 500 features more intrinsic diversification than the Nasdaq, which primarily focuses on technology and biotech stocks. If you’re looking to add more diversification to your portfolio, you may want to learn towards the S&P 500.
It’s important to remember that you don’t necessarily need to choose one or the other when investing in an index. You may want to include investments in both the S&P 500 index and the Nasdaq Composite when creating your portfolio.
Make Your Investment Decisions with Confidence
The Nasdaq and S&P 500 are both stock market indexes used to track specific segments of the market. While the Nasdaq focuses primarily on the top technology leaders, the S&P 500 focuses on summarizing the performance of the largest companies in the United States. The best market index to invest in will vary based on your risk tolerance, with the S&P 500 usually considered to be the more stable choice for long-term investors.
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