Stocks on the US Nasdaq index make the headlines here in the UK too. We can’t have missed Nvidia (NASDAQ: NVDA), with a market capitalisation of nearly $3.4trn (yes, trillion). It’s worth more than all the companies of the FTSE 100 combined.
And Tesla always seems to be getting a mention. The Tesla share price is up 31% since the US election. Tesla is still well below Nvidia’s rise in the past five years:
Flying tech stocks
On Friday (22 November) the Nasdaq closed at 19,003 points. On the same date in 2019, it ended at 8,520 points. That’s a gain of 123%.
My imagined £5,000 invested in a low-cost Nasdaq index tracker fund back then would be worth around £11,300 today. There’d be some small charges for the fund management. But the Nasdaq pays an average dividend of around 1.8%, so I’ll treat them as canceling out.
My key, and surprising, take on this is how small that gain is. I mean, this is the index that provides overnight multibaggers, isn’t it?
Index comparison
Over the same five years, the broader S&P 500 has risen by 92%, only just behind the Nasdaq. The dividend yield is similar, at around 1.2%.
Based on this, the S&P seems like a better index to track than the Nasdaq, even if just for lower risk. But that’s only looking back five years.
Winding the clock back a decade, the S&P 500 has gained 189%, but the Nasdaq is up a whopping 303%. So before I decided which to track, I’d carefully examine multiple timescales and think about my own investment horizon.
My £5,000 invested in a Nasdaq tracker 10 years ago could be worth £21,500 now. And, the same amount invested when the tech index started in February 1971 could have grown to £948,600. Not that my pocket money reached five grand back then, mind.
Concentration
But that five-year return seems disappointing, but it reminds me of one main lesson. The Nasdaq’s gains are concentrated among just a few key stocks.
Right now, it’s mostly the so-called ‘Magnificent Seven’. That’s Nvidia and Tesla, along with Apple, Microsoft, Amazon.com, Alphabet, and Meta Platforms. They all have artifical intelligence (AI) in common.
CNBC runs its own Magnificent 7 index, and that’s up 320% just since it started in December 2022.
Nasdaq leader
To get back to Nvidia, what we see there is a five-year gain of 2,549%. And to get some idea of where that growth came from, the company posted total revenue back in 2020 of $10.9bn.
Then by the year to January 2024, total revenue had reached a whopping $60.9bn. Q3 revenue this year, reported on 20 November, reached $35.1bn. That’s in a single quarter alone. Still, as it looks like growth might slow a little, investors weren’t satisfied, and the price dipped a little.
As investors, we need to be aware that Nasdaq growth is often concentrated in a small number of stocks. The index can be very volatile too, and it’s not really for those who don’t want risk.
Still, if I’d put a shilling in it in 1971…
This post was originally published on Motley Fool
