When analyzing the performance of the U.S. stock market, two of the most commonly referenced indices are the NASDAQ and the S&P 500. While each index serves its own purpose and uses different methodologies, many investors are surprised to learn that there’s significant overlap between them. This overlap is particularly important for those diversifying their portfolios or comparing index-based investment funds. Understanding the NASDAQ and S&P 500 overlap can provide deeper insight into market exposure, sector weighting, and how these indices react to economic trends.
Overview of the NASDAQ and S&P 500
What is the NASDAQ?
The NASDAQ Composite Index includes more than 3,000 companies listed on the NASDAQ stock exchange. It is heavily weighted toward technology and growth-oriented companies, including some of the biggest names in the world like Apple, Microsoft, Amazon, and Alphabet. Unlike the S&P 500, the NASDAQ includes many smaller and mid-sized companies as well.
What is the S&P 500?
The S&P 500, or Standard & Poor’s 500 Index, consists of 500 of the largest publicly traded companies in the United States. It is a market-cap-weighted index that aims to reflect the overall health of the U.S. economy. The index covers all sectors, including technology, healthcare, financials, energy, and consumer goods.
Understanding the Overlap
Despite being two different indices with different criteria, there is a notable overlap between the NASDAQ and the S&P 500. In fact, many of the largest companies in the NASDAQ Composite are also key constituents of the S&P 500.
Why Does Overlap Happen?
Overlap occurs because some of the biggest tech giants, such as Apple, Amazon, Microsoft, and Google, are both listed on the NASDAQ exchange and are among the largest companies in the U.S. market by market capitalization. Since the S&P 500 includes large-cap U.S. companies, these firms are naturally included in both indices.
Examples of Overlapping Companies
- Apple Inc. (AAPL)
- Microsoft Corporation (MSFT)
- Alphabet Inc. (GOOGL, GOOG)
- Amazon.com Inc. (AMZN)
- Meta Platforms Inc. (META)
- NVIDIA Corporation (NVDA)
- Tesla Inc. (TSLA)
These companies are not only present in both indices but also represent a substantial portion of the total market capitalization for each index, influencing performance significantly.
Percentage of Overlap
According to various financial data sources, the overlap in terms of market capitalization between the NASDAQ 100 and the S&P 500 can range between 40% to 50%. This means that if you invest in both indices, nearly half of your investment exposure could be concentrated in the same companies.
Implications for Investors
This overlap has several important implications:
- Diversification: Investors seeking diversified exposure by investing in both indices may not be as diversified as they think, especially in terms of sector and stock concentration.
- Performance Tracking: The performance of both indices may correlate closely due to the shared influence of mega-cap tech stocks.
- Volatility: Overlap in high-growth technology stocks can increase volatility in both indices, particularly during market downturns or tech-specific sell-offs.
Differences Between the Indices
While overlap exists, it’s also important to understand what makes the NASDAQ and S&P 500 different.
Number of Companies
The NASDAQ Composite includes over 3,000 companies, while the S&P 500 has only 500. This means the NASDAQ represents a broader but more tech-heavy universe.
Sector Weighting
- NASDAQ: Heavily weighted toward technology, with over 50% of its allocation in the tech sector.
- S&P 500: More evenly balanced among sectors including healthcare, financials, industrials, and energy.
Inclusion Criteria
The S&P 500 has stricter criteria for inclusion, including profitability and market cap thresholds. The NASDAQ Composite includes all stocks traded on the NASDAQ exchange, regardless of size or profitability.
How Overlap Affects Portfolio Strategy
When building an investment portfolio, it’s crucial to understand how much exposure you’re getting to individual stocks and sectors. If you own both NASDAQ-100 ETFs and S&P 500 index funds, you might be overweight in the top tech stocks without realizing it.
Portfolio Duplication
Holding both indices may cause a high level of duplication. This means that a downturn in one major stock such as Apple or Amazon could have a double impact on your portfolio.
Rebalancing Tips
- Use diversification tools like sector ETFs or international funds to reduce overlap.
- Periodically review portfolio weightings to ensure no single company or sector dominates your holdings.
- Consider complementing U.S. large-cap exposure with small-cap or value-oriented investments.
Performance Comparison
Due to its tech bias, the NASDAQ often outperforms during bullish market phases, especially when technology stocks lead the rally. Conversely, the S&P 500 tends to be more stable during market downturns due to its broader sector diversification.
Historical Trends
- During tech booms: NASDAQ outperforms significantly due to the dominance of high-growth firms.
- During market corrections: The S&P 500 usually experiences less volatility due to its balance among sectors like consumer staples and utilities.
There is a substantial overlap between the NASDAQ and the S&P 500, particularly among large-cap tech stocks. For investors, this means that holding both indices may not provide as much diversification as expected. While each index has its unique structure and sector emphasis, the influence of companies like Apple, Microsoft, and Amazon is deeply felt in both. Understanding this overlap helps in building a more balanced and intentional investment portfolio. To optimize returns and manage risk effectively, investors should be aware of overlap, monitor concentration, and diversify across regions, sectors, and asset classes.