With the volatility that has plagued the global markets, especially the US stock market, this year, you may be tempted to add international exposure to your portfolio right now. This may be based on the golden principle of investing – buy low, sell high. And when you think of investing in the US stock market, its two primary indices may come to mind – Nasdaq 100 and S&P 500. But before you do that, it’s important to understand some fundamentals of these two indices.
What you need to know about Nasdaq 100
- Nasdaq 100 is a US stock market index that is made up of 100 of the largest companies that are listed on the Nasdaq stock exchange.
- It is a tech-heavy index with the technology sector accounting for about 56% of the index’s weight.
- It includes Big Tech like Apple, Amazon, Alphabet, Meta and all other tech giants such as Intel, Tesla, Adobe, etc.
- Other than tech, it includes companies from the consumer services sector, telecommunications, healthcare, industrials, etc. However, it excludes the financial industry like commercial and investment banks.
- Since the index is tech-heavy, it has been the most hit this year and is almost 30% down year-to-date.
What you need to know about S&P 500
- S&P 500 is a broader market index and includes 500 of the largest companies that are listed on stock exchanges like NYSE, Nasdaq, or Cboe.
- It primarily includes large-cap US stocks from various sectors such as healthcare, technology, financial services, etc., that better reflect the US economy and market.
- The companies included in the S&P 500 represent almost 80% of the total market cap of all the companies listed on the US stock exchange.
- Year-to-date, S&P 500 is down about 17%. While it entered a bear market earlier this year, it is now out of it.
Should you invest in Nasdaq 100 and S&P 500 right now?
It is recommended by experts to have a certain level of international exposure. This could range from anywhere between 5% to 15% depending on your risk profile and financial goals. International exposure to markets like the US is important because the Indian and the US stock markets are not perfectly correlated. This means that poor returns from one market may be made up for by better returns in another market depending on the macro and micro economic situations at the time. While this is not always a given, this pattern has been historically observed.
Investing in major indices like Nasdaq 100 and S&P 500 is a smart way to invest in the US market because it allows for diversification and adjusts risk. Since you may not know enough about the US stock market and how its economy works, betting on individual companies and investing in stocks directly may be tricky. Hence, investing in Nasdaq 100 and S&P 500 index funds and mutual funds is a prudent way to go about it.
If you want to invest in these indices right now, it’s important to remember a few things. Firstly, you will need to regularly rebalance your portfolio to really benefit from such investments. You will have to systematically and passively invest in these indices instead of opting for lump sum investments. For both these purposes, you can consider investing through an Indian Asset Management Company and look to invest in equity mutual funds or index funds that hold such international investments. The fund manager would take care of the regular rebalancing to earn maximum returns and make tactical investment decisions depending on the market scenario.