Nasdaq-100 vs. S&P 500: Which Is the Better Long-Term Investment?

Search Fintrev

Search our guides, reviews and glossary.

The Nasdaq-100 tracks the 100 largest nonfinancial companies listed on the Nasdaq stock exchange. The S&P 500 tracks 500 leading U.S. companies drawn from several exchanges, roughly two-thirds of it outside technology, in sectors such as financials, healthcare and consumer discretionary. Both are weighted by market capitalization. The Nasdaq-100 holds far fewer stocks and leans heavily toward technology and growth companies. Over the past two decades that concentration has produced higher returns, along with deeper losses when growth stocks fall.

Nasdaq-100 vs. S&P 500: Key Differences

How It Works

Both indexes weight each company by its market value. The larger a company’s valuation, the bigger its share of the index and the more its price moves the index. The Nasdaq-100 uses a modified market-cap method, with rules that trim the weight of the very largest holdings when they grow too dominant. The S&P 500 uses float-adjusted market cap, counting only shares available to public investors. A selection committee also applies eligibility rules, including a profitability test.

The two indexes overlap heavily at the top. The largest companies in each, such as Nvidia, Apple, Microsoft, Alphabet and Amazon, are the same. The difference is what surrounds them. In the Nasdaq-100, those giants make up a larger slice of a 100-stock portfolio. In the S&P 500, the same names share space with banks, insurers, energy producers, industrial firms and hundreds of other companies.

Not every Nasdaq-100 company is in the S&P 500. The Nasdaq-100 admits some companies based outside the United States, while the S&P 500 is limited to U.S. companies.

Why It Matters

Choosing between the two is a decision about concentration. The Nasdaq-100’s outperformance over the past 20 years came largely from its heavy weighting in high-growth technology. Low borrowing costs, major technological shifts and investor enthusiasm for these companies’ earnings potential all supported that growth.

Those strengths also carry risk. Growth stocks are often priced for their best-case outcomes, reflected in high valuations on metrics like the P/E ratio, so a modest disappointment can set off a sharp sell-off. From its 2000 peak to its 2002 low, the Nasdaq-100 lost roughly four-fifths of its value and took many years to recover. The S&P 500 fell by much less, because its non-tech sectors cushioned the decline.

Example

Hypothetical illustration, not actual index returns. Suppose an investor puts $10,000 into each of two funds. Fund A, a concentrated growth index, falls 50% in a downturn. Fund B, a broad index, falls 30%.

• Fund A drops to $5,000 and needs a 100% gain to return to $10,000.
• Fund B drops to $7,000 and needs about a 43% gain to recover.

A deeper loss requires a disproportionately larger rebound. A concentrated index can still finish ahead if its recovery and later growth are strong enough, as the Nasdaq-100 has over recent decades, but only for investors who stay invested through the drop.

Timing also changes results. Someone who bought near a peak, or who had to sell during a slump, could see very different outcomes from the long-term averages.

Limitations

• Past outperformance is period-specific. The Nasdaq-100’s lead reflects an era that favored technology. A different environment, such as one with higher interest rates or falling tech valuations, could reverse the gap.
• Overlap reduces diversification. Holding both indexes does not double diversification. The same megacap companies dominate each, so a combined portfolio leans even more toward those names.
• No financials. The Nasdaq-100 leaves out an entire sector by design, which makes it a narrower measure of the U.S. economy than the S&P 500.
• Fund costs and tracking. Returns investors receive come from ETFs or index funds, which charge expense ratios and can track their index imperfectly.

The Bottom Line

The Nasdaq-100 has been the stronger long-term performer, at the cost of higher volatility and deeper drawdowns. Investors with a long horizon and a high tolerance for losses may accept its concentration. Those who want a single core holding that reflects the wider U.S. market often prefer the S&P 500. Some hold both, knowing the top holdings overlap.

FAQs