How to Invest in the NASDAQ Index
Investing your money is essential to prepare for retirement, rather than just stashing money away in a savings account.
Instead of buying individual stocks or bonds, another strategy is to invest in index funds that track the performance of the NASDAQ Composite Index (ticker symbol IXIC), one of the major indices for the U.S. stock market.
While past returns are not guarantees of future performance, the NASDAQ index has historically performed well.
According to Morningstar, the NASDAQ index had an average annual return of 16.03% over the past 10 years.
If you want to learn how to invest in NASDAQ index funds, here’s what you need to know.
What is the NASDAQ Index?
While you can buy individual stocks or bonds on your own, it can be a costly, time-consuming, and risky process.
A different approach that can help you invest more wisely is to invest in index funds.
An index fund is a type of investment, such as a mutual fund or exchange-traded fund (ETF), whose objective is to invest in a group of securities that follow the performance of a set benchmark or index.
Index funds may invest in stocks or bonds and can be composed of hundreds or even thousands of different securities. While there are many different indexes, three of the most popular are the S&P 500, the Dow Jones Industrial Average, and the NASDAQ Composite Index.
The NASDAQ Composite Index is an index made up of approximately 3,000 common equities listed on the NASDAQ stock exchange.
Securities in the index include stocks, real estate investment trusts, and American depositary receipts.
Some of the biggest companies within the NASDAQ Composite Index include Amazon, Intel, and PepsiCo.
Investments That Track the NASDAQ Index
If you want to invest in the NASDAQ index, you have two main options: mutual funds and ETFs.
With a mutual fund, a company pools your money with cash from other investors to buy securities like stocks and bonds.
As an investor, you buy shares in the fund. The fund is professionally managed and has relatively low investment minimums.
Mutual funds usually invest in hundreds or even thousands of securities at once, so you can diversify your investments.
If you’re looking for a mutual fund that tracks the NASDAQ index, a popular option is the Fidelity NASDAQ Composite Index Fund (FNCMX). This fund seeks to provide results that closely correspond to the performance of the NASDAQ Composite Index. It has a total expense ratio of 0.28%.
Like mutual funds, ETFs allow you to pool your money with other investors to buy stocks and bonds.
However, ETFs are traded on a national stock exchange and at market prices that may or may not be at the net asset value of the shares.
If you want to invest in an ETF that tracks the NASDAQ index, consider the Fidelity NASDAQ Composite Index Tracking Stock ETF (ONEQ). This fund invests in 80% of the assets in common stocks included in the index and seeks to provide investment returns that correspond with the performance of the index. The gross expense ratio is 0.21%.
How to Invest in the NASDAQ Index
If you want to invest in the NASDAQ Composite Index, you can do so in just three steps:
1. Identify target NASDAQ index investment
Decide what makes the most sense for you: investing in mutual funds or ETFs.
Once you’ve determined which is best for your needs, you can research top-performing funds that track the NASDAQ index’s performance.
Can’t decide between them? Consider these key differences:
- Trading times: Mutual funds can only be traded once per day. All trades are made after the market closes at 4:00 p.m. ET. If you place an order after that time, the order won’t be completed until the next day, after the market closes. If the price of the mutual fund’s shares changes, you may have to pay a higher price. By contrast, ETFs can be traded throughout the day.
- Investment minimum: Mutual funds typically have an investment minimum of $1,000. If you don’t have that much saved yet, an ETF may be a better option. You can often get started with just the cost of a single share.
- Order types: ETFs have more flexibility than mutual funds when it comes to pricing. For example, you can set up limits to automatically buy or sell securities when they reach a certain price.
2. Buy shares with your IRA or 401(k)
If you currently have an IRA or 401(k), you can buy shares of mutual funds or ETFs with your current account.
To do so, just log into your account and search for your desired NASDAQ index funds’ ticker symbols. You can enter how many shares you want to purchase and set up automatic contributions to continue purchasing shares going forward.
3. Open a brokerage account
If you don’t have access to a retirement account, you can open a brokerage account to start investing in index funds instead.
When shopping around for a brokerage firm, compare companies’ minimum investments, fees, and the type of investments they offer. Some companies allow you to invest in individual stocks, mutual funds, and bonds, while others only specialize in ETFs.
If you’d prefer to be a passive investor, you may want to sign up with a brokerage firm that is also a robo-advisor.
The company will review your financial goals and risk tolerance and design a portfolio and asset allocation that meets your needs.
Investing in the NASDAQ Composite Index allows you to invest in a range of large and small companies and different securities.
By taking advantage of index funds that follow the NASDAQ index, you can track its performance and diversify your portfolio.
Advantages of Index Investing
If you want to invest your money in the stock market, investing in index funds is one way to go -- such as funds that track the performance of the NASDAQ index rather than buying individual stocks.
You can buy shares of mutual funds or ETFs.
The fund manager will buy all of the securities within the index or a representative sample.
If you were to buy individual stocks on your own, you’d have to buy thousands of stocks to replicate the diversification of the NASDAQ index, requiring you to spend hundreds of thousands of dollars and complete thousands of trades.
But when you invest in index funds, you can invest in mutual funds and ETFs and instantly diversify your portfolio within a single transaction.
ETFs and mutual funds are a good option for passive investors. They don’t need to be actively managed, so they tend to have lower fees than other investment options.
The average fee for mutual funds is 0.68% and 0.20% for ETFs.
Deciding Between the Different Stock Market Indices
When it comes to investing in the stock market, the three major indices are the NASDAQ index, the S&P 500, and the Dow Jones Industrial Average (DJIA).
While the NASDAQ index is composed of thousands of common equities, the S&P 500 and DJIA are smaller.
The S&P 500 is an index that tracks the performance of 505 of the largest publicly-traded companies in the United States, including Apple and Microsoft.
The DJIA is even narrower in focus. It’s an index made up of 30 of the biggest companies in the country, such as Wal-Mart and Johnson & Johnson.
The NASDAQ index is unique in that it encompasses companies both large and small — especially in the technology sector — and includes securities like real estate investment trusts. It gives a much broader overview of the stock market than the other two indices.