Home Listing method Nasdaq vs. S&P 500 vs. Dow: what’s the difference?

Nasdaq vs. S&P 500 vs. Dow: what’s the difference?

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If you’ve been following financial news, you’ve probably heard of the Dow Jones Industrial Average (DJIA), the S&P 500 or the Nasdaq Composite Index. All three indices are considered to be measures of the performance of the market on a given day. They are also the basis for many investment products which are modeled on their daily price movements. Despite the financial jargon, it can be difficult, even confusing, to distinguish between indices and products based on their performance.

Read on to learn more about the differences between the three indices and how you can base your investment decisions based on their performance and market conditions.

Key points to remember

  • The Nasdaq Composite, the S&P 500 and the DJIA (or Dow) are three indices used to measure market performance.
  • The Nasdaq Composite and the S&P 500 cover more sectors and more stocks in their portfolio, while the Dow is a blue chip index for 30 stocks.
  • The Nasdaq Composite and S&P 500 assign weights based on market capitalization, while the Dow assigns weights based on price.
  • Depending on market conditions and the state of the economy, each index produces different gains or losses. For example, a rising market may produce more gains in the S&P 500 versus the Dow.

Nasdaq vs. S&P 500 vs. Dow Jones: A Sneak Peek

There are three main points of difference between the Nasdaq Composite, the S&P 500 and the Dow Jones. The first concerns their hedging universe and the sectors that are part of the index. The Nasdaq and the S&P 500 cover more companies in different industries than the Dow.

The second difference is their method of assigning weights to individual companies in their index. The Nasdaq and S&P 500 weigh their constituents based on market capitalizations, while the DJIA uses the price of the constituent stocks to determine its weight in the index.

The last difference lies in the criteria used to select the constituents of the respective indices. The Dow Jones is more value oriented and uses a combination of quantitative and qualitative factors to determine whether a given stock should be included in an index relative to the other two.

Nasdaq composite

Launched in 1971, the Nasdaq Composite Index had an initial value of 100 and includes almost all companies listed on the Nasdaq Stock Exchange. In fact, one of the criteria for inclusion in the index is a stock market listing.

The Nasdaq Composite has over 3,000 stocks as constituents and is a capitalization-weighted index, meaning that it assigns weights based on the market capitalizations of the respective companies. The performance of the composite mirrors that of the stock market, which in turn is indicative of the performance of the technology sector. Indeed, the sector represents around 50% of the overall composition of the index. The top 10 companies followed by the index were tech giants and accounted for 44.8% of the total weight of the index according to a study from December 2021.

As the stature of the tech industry has grown, the value of the Nasdaq Composite has increased. For example, during the dot-com bubble that engulfed tech stocks at the turn of the century, the Nasdaq Composite soared to 5,046.86 on March 9, 2000. It collapsed over 4,000 points in a short time. after and took 15 years to reach 5,000 again. The pandemic-induced stock boom boosted tech valuations again in 2021, and the index’s value soared, reaching an all-time high of 16,057 , 44 on November 19, 2021.

The Dow Jones Industrial Average (DJIA)

The Dow Jones Industrial Average (DJIA) was established in 1896 with 12 members and is the oldest of the three indices. With just 30 voters, the Dow Jones, as it is popularly known, also has the fewest members. The Dow is a large-cap price-weighted index, which means that its overall value is determined by the daily stock prices of its constituents.

Thus, a stock with a high price will have a disproportionate impact on the value of the Dow Jones. The Dow Jones is considered a blue chip index because it tracks the performance of key companies that are household names and are said to be a subset of the US economy.

But it is not exhaustive. For example, there are no utilities or transportation companies in the Dow Jones. (They are followed by the Dow Jones Utility Average and the Dow Jones Transportation Average.) As of December 2021, the Dow was covering stocks in nine sectors ranging from information technology (IT) to energy and finance.

The Dow Jones selection criteria are a mixture of quantitative and qualitative factors. Thus, it includes companies which have a solid reputation in their respective sectors and which are used to generating profits in the long term. The emphasis on qualitative factors restricts the number of companies that can become members of the index. In contrast, the Nasdaq Composite and the S&P 500 have a broader coverage universe that attempts to cover many companies in different industries.

The selective makeup of the Dow Jones means that it is not always an accurate measure of the performance of the stock market or the US economy. For example, in a bull market, it may happen that investors abandon established names for growth stocks that may not be represented in the index. During these periods, the S&P 500, which includes more companies, will post higher gains than the DJIA. The Dow Jones closed at a record high 36,432.22 points on November 8, 2021.

S&P 500

Like the Nasdaq Composite, the S&P 500 is a market capitalization weighted index of large cap stocks. It has 500 components that represent a diverse set of companies from multiple industries. In 1999, the S&P and MSCI developed the Global Industry Classification Standard (GICS), a global classification system for enterprises, and created 11 sectors and 68 industries which are represented in the index. The S&P 500 is considered to be a better reflection of market performance in all sectors compared to the Nasdaq Composite and the Dow. The downside of having more sectors included in the index is that the S&P 500 tends to be more volatile than the Dow. Thus, its gains may be higher on days when the market is doing well and its losses greater when the market is falling.

To be included in the S&P 500, a company must meet certain quantitative criteria. These include a market cap of over $ 11.8 billion, a free float of at least 10% of its shares, and a positive sum of earnings from the most recent and past four quarters. The S&P 500 peaked at 4,712.02 on December 10, 2021.

Which is the best investment: the S&P 500, the Nasdaq Composite or the Dow?

The valuations of indices in all three sectors are highly correlated. So the three usually go up or down together. But the extent of the gains or losses differs for each index. The decision to invest in a particular index depends on your strategy and your goals. If you want to profit from the gains of a large part of the market, the S&P 500 is your best bet.

But if you are interested in a safe strategy that reflects the price movements of well-established blue-chip stocks, then the Dow is a good choice. Finally, if you want greater exposure to the tech sector, an investment in a product related to the Nasdaq Composite will focus your portfolio.

Choosing a particular index, however, is not a zero-sum game. Several actions are included in the three lists. This is especially true for stocks in the bottom up sectors of the economy.

Depending on the economy and the state of the markets, indices produce different individual returns even though they reflect each other’s price movements. Here’s an example: In the 2010 bull market, the DJIA rose 11% from the 12.8% jump for the S&P 500. Meanwhile, the Nasdaq Composite posted gains of 17% on strong performance from the tech sector, which dominated stock performance that year.

The higher S&P 500 figure in 2010 was mainly due to a larger number of smaller stocks, which attract investors’ cash flow during stock market booms, into the index. But the preponderance of smaller stocks means the S&P 500 loses value during downturns, when investors flee to relative safety and the dividends of the big names in the Dow.

The bottom line

The S&P 500, the Dow and the Nasdaq are different indices used to track market performance. Even though they have different pedigrees, inclusion criteria and sector composition, indices generally move in the same direction.

Depending on the economy and the state of the markets, one index may produce higher returns than others. For example, in rising markets, the S&P 500 may generate higher gains than the Dow Jones due to the presence of more sectors and small cap stocks in its portfolio. The reverse happens during downturns, when investors look to the safe harbor provided by stocks of well-established companies with proven business models and dividends.

Frequently Asked Questions

What is the difference between the S&P 500, the Nasdaq Composite and the Dow?

There are three main points of difference between the S&P 500, the Nasdaq Composite and the Dow: the criteria they use to include stocks, their method of assigning weights to constituents, and their hedging universe. While the Nasdaq and S&P 500 are weighted based on market capitalization, the Dow assigns weights based on the price of a stock. The Nasdaq and the S&P 500 also have an increasingly broad hedge universe relative to the Dow.

Which is the best investment: the S&P 500, the Nasdaq Composite or the Dow?

Depending on the economy and the state of the markets, one index may produce higher returns than others. For example, in rising markets, the S&P 500 may generate higher gains than the Dow Jones due to the presence of more sectors and small cap stocks in its portfolio. The reverse happens during downturns, when investors look to the safe harbor provided by stocks of well-established companies with proven business models and dividends.

What is the difference between a price weighted index and a market capitalization weighted index?

In a price-weighted index, the stock price is used to assign weights. Thus, a stock with a high trading price will be given more weight compared to a stock with a lower price. In a market cap weighted index, a stock with a higher market cap is assigned a higher weight compared to a stock with a lower market cap.


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