Nasdaq vs. S&P 500 head to head: who is better to invest in?

The year 2024 has so far been a purposeful display of shattering predictions. The analyst consensus expected at the beginning of the year that the leading indices on Wall Street would rise by only about 1%, but the indices themselves had other plans. The Nasdaq has jumped more than 22% this year, and the S&P 500 has jumped 16%.

In addition, three new records were broken on Wall Street this week: the Nasdaq 100 crossed the 20,000-point level for the first time, the Nasdaq general index (composite) closed above 18,000 points for the first time, and the S&P 500 crossed the 5,500-point mark .

In periods of gains, the Nasdaq technology index usually stands out for the better. Like this year, it has also been the case in almost every long-term period in the past. In the last 16 years, for example, while the latter gave investors a return of 314%, the technology-biased index presented a double return – 675 %. If so, is the Nasdaq enough, what is the difference between the indices and who is suitable for each one? Globes is in order.

Investment in technology versus investment in the economy

The S&P 500 index is considered the benchmark of the investment world. The 500 companies traded in it make up about 80% of the total market value of all stocks traded in the US. The fact that it is so broad is one of the significant advantages of the S&P 500 compared to the Nasdaq. Although both the S&P 500 and the Nasdaq rely on technology giants, the concentration of the Nasdaq index in the technology sector is significant.

In addition, the weight of the two leading sectors where most of the technology giants are located (information technology + communication) constitutes 66% of the weight in the Nasdaq, compared to 38% in the S&P 500.

Another difference is the degree of exposure to the US. While in the technology sector about 57% of the companies’ revenues come from the world and not from the US, in the financial sector it is only 30%, and in the health sector it is only 34%. In other words, says Yaniv Pagut, vice president of the trading department at the stock exchange: “The investor has to choose whether he wants more global exposure and then he invests through Nasdaq or more exposure to the US and then prefers the S&P 500.”

Who is each of the indicators suitable for?

Investors in Israel are also voting with their feet and flocking to the S&P 500. According to data from the Stock Exchange, since the beginning of the year, the public has poured NIS 7.5 billion into basket funds that follow the S&P 500 index, compared to only NIS 1 billion into those that follow the Nasdaq. The accumulation in instruments that follow The S&P 500 reached NIS 61.5 billion last month compared to NIS 17.5 billion in the Nasdaq.

“We have never been in such a situation where so many people invest in the S&P 500 and the Nasdaq,” claims Pagot. The problem, he says, is that “this time it is not only about institutions, but about many retail investors (individuals, n.a.). In the fall Next time it will hurt much more and for many more people.”

But based on history at least, the big question is what is the investment range. Both the Nasdaq and the S&P 500 are volatile stock indices that show phenomenal performance over time. As befits stock indices, the ups are as sharp as the downs, and the downs are of course much more painful. Therefore, both of these investment products are suitable for long-term investors.

The difference between the indices is smaller than it seems

But what is better? Nasdaq or S&P 500? A comparison of the index components between the Nasdaq 100 and the S&P 500 reveals that the differences are smaller than it seems. According to the data of the Nasdaq Stock Exchange “the total correlation of the daily returns is 93% in the last 15 years, quite impressive in light of the concentrated exposure of the Nasdaq 100 to the field of technology”.

In addition, as the technology giants become stronger, their relative weight in both indices increases. Thus, in the NASDAQ index, the 10 largest stocks make up almost 49% of the weight of the entire index. In the S&P 500, it is 33%. But both indices are mainly about the same stocks (Microsoft, Apple, Nvidia, Amazon, Google, Meta and Broadcom, etc. A number of stocks that ‘change’ such as Tesla and Costco which are on the Nasdaq, and on the other hand Berkshire Hathaway, Eli Lilly and JP Morgan Bank in the S&P 500).

“At the end of the day, investing in the Nasdaq is an ‘all in’ ticket on technology,” says Pagot. “Those who believe in long-term technology and ignore the ‘old economy’ would prefer to invest in the Nasdaq 100. On the other hand, those interested in greater diversification would invest in the S&P 500 “.

“But the volatility in Nasdaq is significantly higher. You need a lot of breathing space because the Nasdaq does rise more, but also falls more. Those who will benefit from the excess returns of the Nasdaq must first of all hold out during the hard blows. In 2022, for example, those who invested in the Nasdaq lost 33% of their money, while those who invested through the S&P 500 lost a little more than 19%.”

But this is wisdom in hindsight. Pagot says that in fact “after the falls in 2022, many, including investment managers, did not dare to enter the Nasdaq. Everyone estimated that the rise in interest rates would be bad for technology stocks, and no one predicted AI.”

The dollar-shekel exchange rate: significant for Israelis

A final point that is important for investors to remember is that in both indices it is an investment that is exposed to the dollar. Which means that when the shekel weakens against the American currency, the Israeli investor will enjoy a return in excess of the index, but when the shekel strengthens, the Israeli investor’s return on these routes will be affected.

How to invest?

In addition to long-term savings through the institutional bodies, investors can expose themselves to investing in the NASDAQ and S&P 500 indices. This is done by buying mutual funds that mimic or basket funds through a personal trading account in banks or through an independent trading account (as well as through personally managed provident funds – IRA ) in the market there are countless parallel funds of the various entities, both in Israel and abroad, and you can be exposed to indices with zero or close to zero management fees, whether you choose a fund that is exposed to foreign exchange or a foreign exchange-neutralized fund. The entities with zero management fees are Harel, Migdal and Kesem. At Meitav and IBI, the management fees are 0.2%-0.4% in the route exposed to the dollar and zero in the currency neutral route.

Mutual funds can also be purchased on the Nasdaq, but there are (fairly low) management fees of about 0.2%-0.3%. Compared to the management fees of about 0.7%-1% in savings such as a savings policy or a provident fund for investment in an institutional body , in these mimetic mutual funds you can achieve the same exposure with significantly lower management fees.