Nasdaq vs S&P 500 which Index fund is best for Investing (2023)

Whether you are a serious investor looking to accumulate wealth or have just begun to dabble in financial markets you may have heard about the Nasdaq and S&P 500 index funds. You probably also heard that index funds with dollar cost averaging are the best investment vehicle according to the great investor Warren Buffet [Link].

This begs the question, which is the better investment: the S&P 500 or the Nasdaq Composite? 

In this article I will explain the difference between these investment vehicles(), and their pros and cons by looking over historical data() and major events that affected them().

By the end of this article you should know everything you need to know to pick the right investment for you. Let’s dive right in. 

Nasdaq Composite Goals and Explanation

NASDAQ Composite – 45 Year Historical Chart | MacroTrends

First, it is important to understand the difference between the 2 indexes. The Nasdaq composite represents the market capitalization-weighted index of more than 3,700 stocks listed on the Nasdaq stock exchange. These stocks are focused primarily on the technology sectors and the goal of the index is to provide an investment to mirror said sector.

S&P 500 Goals and Explanation

https://www.macrotrends.net/2324/sp-500-historical-chart-data

The S&P 500 on the other hand, is a market capitalization-weighted index that comprises 500 large-cap U.S. stocks across various sectors. Since it compromises many different sectors, the index is more broad and thus less likely to suffer aggressive sharp declines in prices. It has the goal of being a safe investment to represent the broad market sectors in the US economy.

Past performance and historical data of the investments

S&P 500 Historical Data

https://www.macrotrends.net/2526/sp-500-historical-annual-returns

The above chart shows the returns at the end of the year of the The S&P 500 index for a half century from 1972 to 2022. In this time, the largest positive return was 34.11% in 1995. The worst performing year was -38.49% in 2008 during the great recession. The average yearly return of the index in this period is 8.83% and the standard deviation is 17.03%.  

The S&P 500, considered a staple index that has withstood the test of time for many decades. It’s only natural to expect that it would perform positively over a long period of time since it includes established large cap companies across multiple sectors.

Nasdaq Composite Historical Data

https://www.macrotrends.net/1320/nasdaq-historical-chart

The above chart shows the returns at the end of the year of the Nasdaq composite from 1972 to 2022. In this time, the largest positive return was 85.59% in 1999 during the Dot-com bubble (more on this later) and the second largest return was 56.86% in 1991. The worst performing year was -40.54% in 2008 during the great recession. The average yearly return of the index in this period is 12.44% and the standard deviation is 25.87%. 

Historically, the NASDAQ has experienced greater volatility (large percent swings in its value) compared to the S&P 500 index.  

Because the Nasdaq Composite is focused primarily on the productive technology sector, when the market is doing well it will outperform the S&P 500 and when the market is trending lower it is subject to more risk. This is reflected in its higher average return per year and its higher standard deviation. In sum, this technology focused index has more downside risk but greater potential for growth when compared to the S&P 500 index. It is important to note that past results are not necessarily indicative of future results but they can be used as a great metric to assess a long term fundamental trend of how an investment can perform in the future. It is more likely to respect the trend than to break it unless a crucial piece of fundamentals change.

Black Swan Events and Adjusted returns 

One important factor to note when comparing these 2 investment vehicles is the dot-com bubble in 1995. This was a period of irrational exuberance and excessive speculation in internet related companies that lasted several years. The stock price of many internet companies including highly unprofitable saw vast increases in their value because of the irrational sentiment.

The period can be compared to other speculative bubbles to article on speculative Bubbles] such as tulip mania or the housing bubble or more recently the crypto Bubble [link]. The Nasdaq Composite in this time quintupled in price but was so overvalued it ended up giving back 75% of its value from its high.

Since this was an unprecedented time of growth caused by an irrational desire to invest in a new industry, it is important to remember that such events are rare and other volatile returns like this are unlikely to happen again.  

Final Summary 

Overall, since the Nasdaq composite has a higher average return and standard deviation for its returns, it outperforms the S&P 500 at the cost of having larger volatility. If investors have the goal of being in the market for a longer period of time (at least 10 years) the Nasdaq will almost always beat the S&P 500 provided they can handle the additional risk and volatility that comes with the investment.

Let me know what’s your favorite index fund. And let me know if there is another group of investments you would like me to compare. Leave a comment and join our email list for more articles like this. 

And always limit your risk,

Andrew Akl

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Information provided on WealthGrasp.com is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circumstances. We do not offer financial advice, advisory or brokerage services, nor do we recommend or advise individuals or to buy or sell particular stocks or securities. Performance information may have changed since the time of publication. Past performance is not indicative of future results.