One of our most popular products is the BetaShares Nasdaq 100 ETF (ASX: NDQ) The Nasdaq 100 Index has significantly outperformed a number other major global equities indices over most timeframes to the end of April 2020, including the recent equity downturn spurred by the COVID-19 pandemic. In the 12 months to 30 April 2020, NDQ’s performance has been 25.3%, which includes a return of 10.9% for the first 4 months of the year. In contrast, the performance of the S&P 500 Index (in AUD terms) has been 7.8% over 12 months, with a 4 month loss of -2.8%.
NDQ’s Index vs S&P 500 Index vs MSCI World Index (AUD): 12 month performance
Source: Bloomberg. As at 30 April 2020. Past performance is not indicative of future performance. Excludes impact of NDQ’s fees and costs. You can’t invest directly in an index.
In this guest post, Mark Marex, Product Development Specialist at Nasdaq, looks at the relative downside risks and performance behaviour of the Nasdaq-100 during the global financial and the current coronavirus crises. This article first appeared on www.nasdaq.com.
For the Nasdaq-100 Index, 2019 marked the culmination of an extraordinary decade of performance driven by its constituents’ unparalleled growth and innovation. At the end of 2009, the Index was just beginning to recover from the Great Financial Crisis of 2008, which triggered the worst recession in 80 years and one of the all-time scariest bear markets in history. For those who were invested in the Nasdaq-100 at year-end 2009, the rewards during the past 10 years have been superb: 369% on a price-return basis, and 426% on a total return basis through year-end 2019 (in US dollar terms). The index’s outperformance of the S&P 500 is likely beyond what most financial forecasters could have guessed 10 years ago, and even gives the dot-com bubble of the 1990s a run for its money. The difference now being, of course, that Nasdaq-100 constituents are generally much more mature, diversified companies with strong fundamentals – from revenues to cash flow to dividends – underpinning their market valuations.
Given the acute impact of the Coronavirus crisis on equity valuations so far in 2020, it is worth considering the relative strengths of the Nasdaq-100 compared to the broader US, as well as global, equity markets. In addition to favorable fundamentals, the Nasdaq-100 has demonstrated its superiority to the S&P 500 from a risk perspective, buttressed by its unique mix of sector exposures.
A Brief History of the Nasdaq-100 during the Global Financial Crisis (GFC)
On a US-dollar price-return closing basis, the Nasdaq 100 declined 53.7% from its peak of 2,238.98 on Oct 31, 2007, to its low of 1,036.51 on November 20, 2008. On the other hand, the S&P 500 declined 56.8% from its peak of 1,565.15 on October 9, 2007, to its low of 676.53 on March 9, 2009. In and of itself, it is noteworthy that the bottoming process for the S&P 500 Index took almost 4 months longer than for the Nasdaq 100 Index . Furthermore, although the Nasdaq-100 had been rightly viewed from its early days as a higher-growth index with concomitantly higher volatility, its observed volatility during this period was often lower than that of the S&P 500. Specifically, from October 24, 2008, thru March 25, 2009, the CBOE Nasdaq-100 Volatility Index (VXN) closed at a level below that of the CBOE S&P 500 Volatility Index (VIX) almost 80% of the time (81 out of 104 trading days).
Extending this analysis to the current crisis. Since March 9, the VXN has closed at a level below that of the VIX 90% of the time (10 out of 11 trading days thru March 23). Prior to March 9, the VIX was lower than VXN every single day of the year.
Why has the Volatility of the Nasdaq-100 been Lower in a Crisis?
Part of the explanation resides with the fundamentals of its constituents. Nasdaq-100 companies have grown their per-share earnings / revenues / dividends by 22x / 6.5x / 40x since 2003, well outpacing the growth for S&P 500 companies (4x / 2x / 3.5x, respectively).
Nasdaq 100 vs. S&P 500 Index Fundamentals Over Time (2003 = 100)
That growth has positioned them very well as a group to ride out the coming economic storm. The strongest illustration of the Nasdaq-100’s economic resilience comes directly from companies’ balance sheets. As of the most recent reporting quarter, these 100 firms as a group held in excess of $800Bn of Cash, compared with $1.3Tr of Debt. Overall, the Cash-to-Debt ratio stood at 0.63. For the S&P 500, the ratio is much lower at 0.29, based on $1.8Tr of Cash versus $6.1Tr of Debt for the 452 non-Financial, non-Insurance constituent firms1:
Looking toward income statements, we see an even more dramatic disparity. the Nasdaq 100 firms collectively generated $680Bn of annual EBIT, enough to cover their full-year interest expenses of $43Bn almost 16 times over. S&P 500 firms, on the other hand, generated $1.43Tr of EBIT, enough to cover their interest expense of ~$200Bn by only 7.3 times.
The Nasdaq-100 is arguably better positioned than the broader S&P 500 to enter into an economic downturn, both from the perspective of accumulated cash-on-hand, as well as the starting point of how much operating income is available to meet interest payments on debt. While it may be difficult to quantify the overall degree of financial stability among the two indexes, the Nasdaq 100 presents a superior picture of financial health from the standpoint of overall debt obligations and ability to service them.
Sector Exposures Matter
On a more qualitative level, consider the differences in sector exposures between the Nasdaq 100 & S&P 500 Index:
As at 31 December 2019
With no exposure to Financials, the Nasdaq 100-Index is relatively more shielded from adverse down-the-line consequences to financial markets as a result of economic disruption in the real economy. With no exposure to Oil & Gas, Nasdaq-100 is also relatively more shielded from the turmoil in energy markets. Broadly speaking, the lower exposure to sectors engaged
in heavy manufacturing (Industrials & Basic Materials) portends less stress on constituent firms from widespread supply chain disruptions. Finally, the lighter exposures to subsectors such as Airlines, Travel & Leisure, Restaurants, and other areas of Consumer Discretionary can be reasonably expected to limit the downside from collapsing consumer demand in the non-food / non-medical / non-utilities sectors.
All of the above leads us to now look at the historic outperformance of the Nasdaq-100 vs. the S&P 500 over the course of this year, with a return differential of almost 11% on a price return basis. Nearly half of the differential has been generated since the broader equity markets peaked on February 19.
Investors who remain optimistic about the long-run prospects of the economy face a critical decision in the near-term about how to reallocate across their portfolios. The Nasdaq-100 Index has recently demonstrated its superiority to the broader S&P 500 Index from a pure risk perspective, as measured by their respective options’ volatility indexes. This has been seen once before, in the midst of the Great Financial Crisis of 2008-9. While certainly driven in part by Nasdaq-100’s exclusion of Financials, there exists additional evidence in the form of more favorable financial ratios at the constituent level, too. All of which suggests that, however long this bear market endures, the Nasdaq-100 arguably has potential for less downside relative to the S&P 500 for investors looking to preserve some equity exposure.
Sources: FactSet, Bloomberg, Nasdaq Global Indexes.
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