Nasdaq Composite vs. S&P 500 vs. Dow: An Overview
If you follow financial news, then you have likely heard of the Dow Jones Industrial Average (DJIA), or Dow, the S&P 500, and the Nasdaq Composite Index. All three indexes are considered measures of stock market performance on any given day. They are also the basis for many investment products that follow their daily price movements.
Financial jargon notwithstanding, it can be difficult to distinguish between the indexes as well as the products that track their performances.
There are three main points of difference between the Nasdaq Composite, the S&P 500, and the Dow:
1. The first difference relates to the stocks and sectors that each index covers. The Nasdaq Composite and the S&P 500 cover more companies in different sectors than the Dow does.
2. The second difference is their method of weighting individual companies. By weighting companies, an index establishes the effect a company has on overall index performance. The Nasdaq Composite and the S&P 500 weight companies based on market capitalization (market cap), while the Dow weights each constituent based on stock price.
3. The final difference is the criteria used to select the companies to be included in an index. Compared to the Nasdaq and S&P 500, the Dow is more value-oriented and uses a mix of quantitative and qualitative factors to determine whether a given stock should be included in its index.
Key Takeaways
- The Nasdaq Composite, the S&P 500, and the Dow Jones Industrial Average are indexes that are used to measure market performance.
- The Nasdaq Composite and the cover more sectors and have more stocks in their portfolios compared to the Dow, which is a blue-chip index of 30 stocks.
- The Nasdaq Composite and the S&P 500 assign weightings based on market capitalizations, while the Dow assigns weightings based on price.
- Depending on market conditions and the state of the economy, each index has different gains and losses.
- For example, a rising market may produce more gains in the S&P 500 than in the Dow.
Nasdaq Composite
Launched in 1971, the Nasdaq Composite Index had an initial value of 100. It includes almost all companies listed on the Nasdaq stock exchange. In fact, one of the criteria for inclusion in the index is a listing on the exchange.
Composition
The Nasdaq Composite has more than 3,400 stocks and is acapitalization-weighted index. The composite’s performance reflects that of the entire Nasdaq exchange, which in turn reflects the performance of thetechnology sector.
This is becausethe tech sector makes up roughly 57% of the overall composition of the index. The top 10 companies tracked by the index are technology giants and accounted for over 52% of the overall weight of the index, as of October 2023.
Performance
As the tech industry’s stature has grown, the Nasdaq Composite’s value has surged. For example, during the dotcom bubble that engulfed tech stocks at the turn of the 20th century, the Nasdaq Composite skyrocketed to 5,046.86 on March 9, 2000. It crashed by more than 4,000 points shortly thereafter and took 15 years to reach 5,000 again.
The pandemic-induced boom in stocks once again boosted tech valuations in 2021, and the index’s value shot up, reaching a high of 16,057.44 on Nov. 19, 2021.
The index closed at an all-time high of 16,742.39 on May 15, 2024.
S&P 500
TheS&P 500was established in 1957 as an index that would track the value of500 corporations listed on theNew York Stock Exchange (NYSE)and theNasdaq. Thus, some stocks that the S&P 500 index includes are also part of the Nasdaq Composite.
Composition
The S&P 500 is a market cap-weighted index of large-cap stocks. Its constituents represent a diverse set of companies in multiple industries. To be included in the S&P 500, a company must meet certain quantitative criteria. These include having a market capitalization of at least $14.6 billion, being highly liquid, and having a public float of at least 10% of its shares outstanding.
In 1999, the S&P and MSCI developed the Global Industry Classification Standard (GICS), a classification system for public companies. As of June 2024, it had 11 sectors and 74 industries. These are represented in the index.
Performance
The S&P 500 is considered a better reflection of the overall stock market’s performance (all sectors) compared to the Nasdaq Composite and the Dow. However, the downside to including more sectors is volatility. Thus, the S&P 500 tends to be more volatile than the Dow. Its gains may be higher on days when the market does well and its losses steeper when the market falls.
The S&P 500 closed at an all time high of 5,308,15 on May 15, 2024.
The Dow is the oldest of all three indexes, having been established in the late 19th century by Charles Dow, the co-founder of Dow Jones & Co. and the Wall Street Journal. Of the 12 companies it included at the beginning, General Electric was remained part of the Dow for over 120 years, until 2018.
Dow Jones
The DJIA was introduced in 1896 with 12 companies. In 2024, it had 30, the fewest of the three indexes.
Composition
The Dow is a price-weighted, large-cap index that covers all industries except Transportation and Utilities (those industries are included in other indexes: the Dow Jones Utility Average and the Dow Jones Transportation Average).
A price-weighted index means that stocks with higher prices will be given more weight than those with lower prices and will have more of an impact on index performance.
The Dow is considered a blue-chip index because it tracks the performance of key companies with sterling reputations and household names. They have a history of generating profits over the long term.
As of May 2024, the Dow covered equities in nine sectors ranging from information technology (IT) and healthcare to energy and financials.
Performance
The Dow’s selective makeup means that it is not always an accurate gauge of the greater stock market’s performance or of the U.S. economy.
For example, in a rising market, there might be instances when investors rotate out of established names into growth stocks that may not be represented in the index. During such periods, the S&P 500, which includes more companies, will have greater gains than the Dow will.
The Dow surpassed 40,000 for the first time on May 16, 2024, after closing at an all-time high of 39,908.00 points on May 15, 2024.
Which Is the Best Investment?
Valuations of the indexes correlate highly. Thus, all three generally rise or fall together. But the extent of gains or losses differs for each index. The decision to invest in a particular index depends on your strategy and goals:
- If you want to capture gains of a broad swath of the market, then the S&P 500 is your best bet.
- However, if you are interested in a more conservative strategy that benefits from the price movements of well-established blue-chip stocks, then the Dow is a good choice.
- Finally, if you seek greater exposure to the tech sector, then an investment in a Nasdaq Composite-linked product will focus your portfolio.
The choice of a particular index is not a zero-sum game, however. Several stocks are included in all three listings. This is especially true of stocks from sectors that are ascendant in the economy.
The indexes produce different individual returns even as they may mirror each other’s price movements. For example:
In the 2010 bull market, the Dow rose 11% vs. the 12.8% jump for the S&P 500. Meanwhile, the Nasdaq Composite racked up 17% gains on the back of an excellent performance of the tech sector, which dominated stock market performance that year.
The higher figure for the S&P 500 in 2010 was primarily a function of its greater number of small-cap stocks. These attract investor flows of cash during stock market booms. But the preponderance of small company stocks means that the S&P 500 loses value during downturns, when investors flee to the relative safety and dividends of blue-chip names in the Dow.
What Is the Difference Between the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average?
Three main differences are: the criteria that each uses to select stocks, their methods of weighting constituents, and their coverage universe. While the Nasdaq Composite and the S&P 500 are market cap-weighted, the Dow is price-weighted. The Nasdaq Composite and the S&P 500 also include a larger number of companies compared to the Dow.
What Kinds of Products Let Me Invest in Indexes?
Exchange-traded funds (ETFs) and mutual funds are two ways to invest in the Dow, the Nasdaq, and the S&P. For example, the SPDR S&P 500 Trust ETF tracks the S&P 500. The Invesco QQQ ETF tracks the Nasdaq Composite. The iShares Dow Jones Industrial Average UCITS ETF (Acc) tracks the Dow.
What Is the Difference Between a Price-Weighted Index and a Market Cap-Weighted Index?
A price-weighted index weights according to price. Thus, a stock with a high price will have a greater influence on index performance than a stock with a lower price. A market cap-weighted index weights stocks according to a company's market capitalization. So, stocks of companies with higher market caps will have a greater influence of index performance than those with lower market caps.
The Bottom Line
The Nasdaq Composite, S&P 500, and Dow are indexes that track stock market performance. Even though they have different histories, selection criteria, and sector coverage, the indexes generally move in the same direction.
Investment products that track the indexes allow people to invest in the performance of the stock market without having to choose and purchase individual stocks. Depending on the economy and the state of the markets, one index may produce higher returns than another.
