APRIL 02, 2014

THE NASDAQ COMPOSITE INDEX

A FOURTEEN-YEAR RETROSPECTIVE
DAVID KREIN | Head of Research NASDAQ OMX Global Indexes JEFFREY W. SMITH | Managing Director NASDAQ OMX Economic Research

HIGHLIGHTS
The NASDAQ Composite continues to be a usefully distinct stock market metric that distinguishes itself from other broad indexes routinely covered in the financial media. Although the NASDAQ Composite has crossed 4000 again, a level last achieved in 1999, the index composition and valuation have experienced dramatic changes during this 14-year period. The changes reflect trends that are NASDAQ-specific, but also reflect the macro forces impacting the broader economy and capital markets. The current index has about half the components it did 14 years ago (4,715 in 1999 versus 2,472 at the end of 2013). The current components, though, are on average about twice the size as they were in 1999. The majority of the securities (by index weight) that left the index since the end of 1999 did so as a result of merger and acquisition activity. The current index is still strongly oriented towards the information technology sector, as it has always been. Currently 46% of the index by weight is classified as Info Tech. The extent of technology orientation, however, appears to be receding. Company valuations at the current index level are much more conservative than during the midst of the tech bubble of 1999/2000. About 20% of current index weight (710 stocks) is from IPOs that NASDAQ brought to market during the last 14 years.

INTRODUCTION
At the end of November 2013, the NASDAQ Composite Index reached the milestone level of 4000 for the second time. The first time the index crossed this level was during the final days of 1999. At that time, what in retrospect became known as the Tech or Dot-com bubble was well underway. By early March 2000 the Composite would go on to reach its all-time peak of 5049, after which it began a precipitous fall as the bubble burst. The following figure illustrates this bubble and the steady climb back to 4000: NASDAQ COMPOSITE INDEX: 19902013
6000 5000 4000 3000 2000 1000 0 JAN. 90 JAN. 94 JAN. 98 JAN. 02 JAN. 04 JAN. 06 JAN. 10 JAN. 14

Well before the tech bubble, but certainly during it, the NASDAQ Composite gained a remarkable level of publicity. Then, as now, the daily performance of the Composite is routinely reported by the mainstream and financial press, along with that of the Dow-Jones Industrial Average (DJIA) and the S&P 500. The term tech-heavy is often used by reporters when mentioning the NASDAQ. Before reviewing the changes that have occurred over the last 14 years, it is useful to understand the details behind the construction of the NASDAQ Composite. The index simply represents the value of all stocks listed on The NASDAQ Stock Market. Included are all common stocks and common equivalents, such as American Depository Receipts (ADRs) and Ordinary Shares (both of which refer to shares of non-US issuers). Derivatives such as warrants, as well as funds such as Exchange-Traded Funds (ETFs) are excluded. This purely transparent and automated approach stands in stark contrast with the Dow-Jones Industrial Average and the S&P 500, the components of which are chosen by committee. The NASDAQ Composite has been around since the launch of NASDAQ on February 5, 1971, when its value was set at 100. The index is market capitalization weighted, meaning that a given stocks weight in the index is proportional to its market cap. A stocks weight is not float-

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adjusted, i.e., reduced to account for shares not available to trade by the investment community. (Specific index rules are in a methodology document available at indexes.NASDAQOMX.com/docs/methodology_ COMP.pdf.) The NASDAQ Composite should not be confused with another wellknown NASDAQ index, the NASDAQ-100. The latter is made up of the top 100 non-financial companies listed on NASDAQ. It began in 1985, and uses an adjusted market cap weighting method that ensures that no single component of the index carries too much weight. It is interesting to note that while the Composite receives the majority of the coverage in the financial press, the NASDAQ-100 is much more prominent in terms of having financial products tied to it. Indeed, the NASDAQ-100 is specifically designed and maintained to provide the basis for financial products. For example, one of the largest ETFs in the world, the PowerShares QQQ, is benchmarked to the NASDAQ-100. The NASDAQ-100 also has a wide array of futures, options, and other products tied to it. As with the Composite, the NASDAQ-100s components are not chosen by committee, but by a set of distinct eligibility criteria and rules-based methodology.

The striking conclusion of the table is that the current index has 48% fewer components as before, but these components are nearly 120% larger than before on average. Also worth noting, while the value of the index at the two points of comparison are about equal, the market capitalization is 15% higher. This change is due to increases in shares of the listed companies, not increases in prices. The results of Table 1 reflect a national trend that extends beyond NASDAQa shrinking number of listed public companies. The following graph shows the number of common stocks listed on the three US listing venues: NASDAQ, NYSE, and NYSE MKT (formerly the American Stock Exchange). The graph illustrates a remarkably steady decline; the end result being that the number of listings is about half of what it was at the start of the 2000s. The causes of this trend and whether capital markets are better or worse off as a result is a fascinating question beyond the scope of this paper. NUMBER OF LISTED U.S. COMMON STOCKS
LISTING VENUES: NASDAQ, NYSE, NYSE MKT
9000 NUMBER OF STOCKS AT MID-YEAR 8000 7000 6000 5000 4000 2000 2002 2004 2006 2008 2010 2012 2014

THE CHANGING NATURE OF THE COMPOSITE INDEX

From day-to-day, changes in the level of the NASDAQ Composite (or no change at all) are reflective of the changes in value of the component stocks. Observers can easily interpret the NASDAQ at 4000, then 4001, then 4010, and so on. This is because the components, over such short time periods, dont change very much, except for their prices. However, over longer time periods such as the last 14 years, the component stocks do change in very significant ways. This means observers cannot easily interpret the significance of NASDAQ 4000 then versus NASDAQ 4000 now. In fact, there are so many changes that have occurred in this 14year period that analyses from several perspectives are warranted and worthwhile.

Table 2 shows the identity and market capitalizations of the top ten components. TABLE 2: TOP 10 COMPONENTS THEN AND NOW 12/31/99 STOCK MICROSOFT CISCO QUALCOMM INTEL WORLDCOM MKT CAP ($BLNS) $606 $360 $332 $277 $228 $151 $132 $117 $103 $75 12/31/13 STOCK APPLE MICROSOFT GOOGLE AMAZON INTEL QUALCOMM CISCO GILEAD SCIENCES COMCAST FACEBOOK MKT CAP ($BLNS) $505 $312 $310 $182 $129 $125 $120 $115 $111 $102

COMPONENT COMPOSITIONS
Table 1 shows the total number of index components at the end of 1999 and the end of 2013. Also shown are the total market cap of the components and the average market cap per component. TABLE 1: COMPONENTS OF COMPOSITE INDEX DEC 31, 1999 VALUE OF INDEX NUMBER OF COMPONENTS TOTAL MARKET CAP ($B) AVG MARKET CAP ($MM) 4069 4,715 $5,453 $1,157 DEC 31, 2013 4177 2,472 $6,271 $2,537 RATIO 1.03 0.52 1.15 2.19

ORACLE DELL SUN MICROSYSTEMS YAHOO JDS UNIPHASE

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The top four companies of 1999 still appear in 2013, but their aggregate market value is 44% of what it was then. The fifth company, WorldCom, went bankrupt in 2002. The combined reduction in market cap of these five securities is about $1.1 trillion, which is nearly 20% of NASDAQs total market cap in 1999. In fact, exclusive of these five stocks, the average market cap per stock rose from $774 million to $2.26 billion, an increase of 192%. The table shows why the index is strongly associated with the technology sector, both in 1999 and currently. It is interesting to see, however, in the current top 10 list the emergence of marquee companies not in the Information Technology sector: Amazon in retailing, Gilead in biotech, and Comcast in media. Also noteworthy is the presence of the largest social networking company, Facebook. Overall, while some names have changed, there can be no doubt that the NASDAQ Composite indexs top components have historically featured companies that are known for innovation and growth.

Most interesting to note is that 54% of the stocks by market cap (and 46% by number of deleted stocks) were removed due to merger and acquisition activity. This runs counter to the popular belief that in the collapse of the tech bubble most of the NASDAQ stocks were dot-coms and deleted due to bankruptcy. This is, in fact, not the case at all. This M&A activity is consistent with a general theme of a market of fewer but larger public companies. Within the M&A category there are several possible outcomes: a.  Both acquirer and target are listed on NASDAQ and the combined entity remains listed on NASDAQ. This would reduce the number of NASDAQ-listed companies, but would not result in a reduction in the market cap of listings. (Presumably the market cap of the combined entity is roughly the sum of the two companies individually.) b. E  ither the acquirer or target is listed on NASDAQ, and the combined entity leaves NASDAQ. This would reduce the number of NASDAQlisted companies and would reduce the market cap of listings. More than 17% of deletions (in terms of value) was a result of companies failing to meet listing standards as a result of declining business prospects, including bankruptcy. The largest company in this category was telecommunications firm WorldCom. This companys demise, along with that of NYSE-listed Enron, was a key trigger behind the Sarbanes-Oxley reforms of 2002 mandating tighter financial management and reporting for public companies. The failure of many of the dot-coms was a trigger for another regulatory reformthe Global Securities Analyst Settlement of 2003. This settlement sought to ensure that research from securities analysts was not conflicted by investment banking relationships. A comparatively small amount of lost market cap was due to companies delisting for reasons other than being forced to delist. An example of this case concerns ADR programs that were cancelled by the (foreign) issuer. Another small group of companies left NASDAQ but continued to trade on the Over-the-Counter (OTC) market. While not representing an outright cessation of trading, this demotion to OTC trading was typically the result of an inability to meet listing standards.

NATURE OF DELETIONS
As the preceding tables illustrate, there has been substantial change in the composition of the index as well as a reduction of about onehalf in the number of components from 2000. What has happened to the companies present in 1999 but no longer in the index? TABLE 3: DISPOSITION OF INDEX COMPONENTS PRESENT AT END OF 1999 NUMBER ALL VETERANS TO END OF 2013 DELETED BY END OF 2013 4,715 1023 (22%) 3692 (78%) TOTAL MKT CAP AT END OF 1999 ($T) $5.43 $2.89 (53%) $2.57 (47%)

About 53% of the market value of the index, drawn from 1,023 issues, has lasted 14 years to continue to be in the index. The other half of market value, made up of almost 3,700 issues, representing 78% of the stocks on NASDAQ at the time, have left the index. Given the numbers, it is clear that the deletions tended to be smaller on average than the veterans ($696 million versus $2.82 billion). NASDAQ tracks the cause behind these deletions, summarized as follows: TABLE 4: REASON FOR NASDAQ DELETIONS NO. STOCKS PCT MKT CAP MERGER/ACQUISITION REGULATORY NON-COMPLIANCE VOLUNTARY DELISTING MOVED TO OTC OTHER TOTAL 1786 674 812 109 311 3692 53.9% 17.4% 25.0% 1.3% 2.4% 100.0%

ADDITIONS TO INDEX
As a flip side to the deletions, analysis of additions to the NASDAQ Composite index can also be considered. The following table provides this information.

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TABLE 5: SOURCES OF NASDAQ COMPONENTS SINCE 1999 AS OF END OF 2013 NUMBER VETERANS IPOS SWITCHES FROM OTHER EXCHANGES UPGRADES FROM OTC OTHER TOTAL 1023 710 147 298 294 2472 PCT OF MKT CAP END OF 2013 61.2% 19.8% 10.8% 1.7% 6.5% 100.0%

CHANGING PROFILE
The large number of changes in component stocks over time has begun to shift the profile of the Composite in meaningful ways.

COMPANY AGE
NASDAQ has always been thought of as the home of younger companies. In fact, it also contains a number of companies dating to the 19th century, many of which are community banks (among the oldest is Hingham Institution for Savings, founded in 1834). On a market-cap weighted basis, however, NASDAQ tends to be a market of younger, growth-oriented companies. Consider the median marketcap weighted age, defined such that half the index market cap is made up of companies older, and half younger, than this median age. For this analysis, age is defined as time from incorporation, not the time from IPO or initial listing. For, example, Facebook was incorporated in 2004 but did not have its IPO until 2012. As of the end of 2013, therefore, its age was nine years. TABLE 6: MARKET CAP MEDIAN AGE OF NASDAQ COMPANIES DEC 31, 1999 15.1 YEARS DEC 31, 2013 25.0 YEARS

The majority of the current value of the Composite is from companies that were in the index in 1999. These 1,023 veterans, which are 61% of the current index value and 41% by number of stocks, have an average size of $3.8 billion, while in 1999 their average value was $2.8 billion. It is interesting to note how these figures look without the top four of 1999: Microsoft, Intel, Cisco, and Qualcomm. In 1999, the 1,019 surviving stocks had a market cap of $1.3 trillion; those same 1,019 veterans had a market cap of $3.2 trillion at the end of 2013, an increase of 140% (versus 33% when the top four are included). The largest source of additions has been IPOs. Over the last 14 years NASDAQ has brought to market 710 stocks that are still listed on NASDAQ today. Perhaps the most prominent among them are Google and Facebook, but there are many other easily recognizable names. Transfers from the NYSE and NYSE MKT totaled 147 and account for about 11% of market value. Most of these transfers have occurred from 2008 forward. Some of the larger switches from NYSE are Twenty-First Century Fox (formerly News Corp), Texas Instruments, and Automatic Data Processing (ADP). Note the large average size of these transfers. The size and number of switchers illustrate a competitive dimension to listings, with moves going in both directions. A comparatively small group of additions have joined the NASDAQ Composite by upgrading from the OTC world. Finally, some companies have joined by other means, typically through some type of corporate action such as a spinoff. A recent example is the listing of Kraft Foods, which was spun off of Mondelez (itself originally known as Kraft). Another example is the parent company of NASDAQ itself, the NASDAQ OMX Group, which was carved out of the old National Association of Securities Dealers (NASD), a regulatory body, and never came to market as an IPO.

All else equal, a mature steady-state capital market would be expected to have a natural cycle of company births and deaths leading to a constant median age. On NASDAQ, however, in 14 years, the median age went up 10 years, indicating substantial maturation. The age of veterans and new additions as of the end of 2013 is shown in the next table. TABLE 7: MARKET CAP MEDIAN AGE OF COMPOSITE COMPONENTS AS OF END OF 2013 MEDIAN AGE (YEARS) VETERANS IPOS SWITCHERS (EXCHANGE + OTC) OTHER 36.9 13.9 16.9 14.2

Not surprisingly, the veterans are the oldest group, their age being exactly 14 years older than it was in 1999. Even at 37 years, however, the veterans are still young companies. Also not surprising is the low median age of the IPOs. The switchers are perhaps surprisingly young. This finding suggests that younger companies are the most likely to switch to NASDAQ. Interpreting the age of the Other group is difficult, since the event that caused the company to be listed in the first place may be closely tied to its birth (for example, a coincident spin-off and NASDAQ listing).

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In all cases, the additions to the NASDAQ Composite during the last 14 years have been younger than the incumbents, keeping the median age lower than it otherwise would have been under natural aging.

TABLE 9: GICS SECTOR OF COMPOSITE COMPONENTS PCT MARKET CAP

GICS SECTOR INFORMATION TECHNOLOGY CONSUMER DISCRETIONARY HEALTH CARE FINANCIALS INDUSTRIALS CONSUMER STAPLES TELECOMMUNICATION SERVICES ENERGY MATERIALS UTILITIES VETERANS IPOS SWITCHES OTHERS

COMPANY INDUSTRY
As mentioned previously, the NASDAQ Composite Index is generally associated with various High-Technology sectors, Information Technology in particular. In comparing the industry orientation of NASDAQ between now and 14 years ago, the only available measure of industry is the Standard Industry Classification (SIC) system of the US government. With these definitions, the top SIC industries (at the fourdigit level) now and then are shown in the following table. TABLE 8: TOP SIC INDUSTRIES LISTED ON NASDAQ End of 1999 SIC INDUSTRY PREPACKAGED SOFTWARE SEMICONDUCTORS COMPUTER PERIPHERALS TELECOM ELECTRONIC COMPUTERS COMPUTER SYSTEMS TELEPHONE APPARATUS ALL INFO TECH PCT OF MKT CAP 23% 10% 8% 7% 5% 3% 3% 57% End of 2013 SIC INDUSTRY PREPACKAGED SOFTWARE ELECTRONIC COMPUTERS SEMICONDUCTORS INFORMATION RETRIEVAL BIOLOGICAL PRODUCTS CABLE TELEVISION PHARMACEUTICAL ALL INFO TECH PCT OF MKT CAP 10% 9% 9% 6% 6% 5% 4% 38%

50% 16% 17% 7% 5% 3% 0% 0% 1% 0%

56% 15% 14% 5% 5% 1% 0% 3% 1% 0%

28% 33% 5% 9% 3% 9% 10% 2% 1% 0%

11% 47% 13% 11% 7% 8% 1% 2% 1% 0%

Analysis of GICS sectors again confirms the strong IT orientation of the NASDAQ Composite, with about half of the NASDAQ Composites market cap in the GICS IT Sector. The IPO additions to the Composite have a sector profile very similar to that of the veterans. Quite interestingly, however, is the fact that the other additions to the NASDAQ Composite do not have the same level of technology orientation. The net result is that the current the NASDAQ Composite has evolved with a lower technology tilt than before.

VALUATION
A hallmark of the 1990s bubble was the sky-high valuation levels of NASDAQ-listed companies. The following table shows price/earnings ratios then and now for a selection of marquee companies. TABLE 10: PRICE/EARNINGS RATIOS OF SELECTED COMPANIES STOCK MICROSOFT INTEL CISCO APPLE QUALCOMM YAHOO END OF 1999 73 35 166 37 224 787 END OF 2013 13 14 13 14 19 35

Figures in the Table 8 provide clear justification for NASDAQs tech reputation. However, comparing the two periods suggests that the current NASDAQ is less tech heavy than in 1999. The sum of all SIC industries that may be considered Information Technology indicates a decline in terms of percentage of market cap from 57% to 38%. Again, one can consider the impact of deletions and additions on the evolution of NASDAQs industry orientation. Instead of using the SIC system, it is preferable to use a proprietary classification system that is more up-to-date and better designed for the use of investors. One such system is the Global Industry Classification Standard (GICS) system offered by Standard and Poors. The following table shows the sector breakdown of current components of the NASDAQ Composite.

The 2013 values of the P/E ratio are much lower relative to their 1999 values. Many components of the NASDAQ Composite in 1999 had no P/E ratio, owing to a lack of earnings. Using its proprietary analytics, Bloomberg provides a number of valuation metrics for indexes as a whole. Here is a set of such metrics for the NASDAQ Composite index.

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TABLE 11: BLOOMBERG VALUATION METRICS FOR NASDAQ COMPOSITE END OF 1999 PRICE/EARNINGS PRICE/BOOK DIVIDEND YIELD INDEX EARNINGS 152 6.7 0.11% 27 END OF 2013 31 3.9 1.22% 133

THREE INDEXES DURING TECH BUBBLE

01 JAN 1995 = 1000
7000 6000 5000 4000 3000 2000 1000 0 JAN. 95 JAN. 96 JAN. 97 JAN. 98 JAN. 99 JAN. 00 JAN. 02 DEC. 02 DEC. 13 | 6 JAN. 01 JAN. 11

SP 500

NQ COMP DJIA

The 1999 P/E ratioagain with the benefit of hindsightseems otherworldly for such a broad index with more than 4,700 constituents. Today, it is now at a much more conservative level, though the current value is still higher than what would be expected for most stocks (more on this below). The same may be said of the Price/Book ratio. The typical NASDAQ stock in 1999 did not pay dividends. Companies of that era were in full-tilt growth mode, and to the extent that earnings were returned to shareholders, it was in the form of share buybacks. That is much less true of the current NASDAQ-listed companies. A good example is long-time dividend holdout Apple, which started paying a regular quarterly dividend only since 2012. The NASDAQ-listed companies of 1999 were not necessarily very profitablehigh earnings were expected for the future. The Bloomberg Index Earnings metric is determined by taking aggregate earnings for the set of components and dividing by the index divisor. This step allows one to compare earnings for a fixed level of shares (just like the price index does). This metric indicates 2013 earnings that are almost five times higher than they were in 1999 for the same number of shares. In sum we see a current NASDAQ Composite more conservatively valued and more profitable than it was in 1999.

While all three indexes rose then fell during the bubble, the pattern of the NASDAQ Composite deviates from the others in spectacular fashion. The next graphic shows the performance of the same three indexes starting in 2005, before the financial crisis and current bull market (all three indexes rebased to the same value at the start of 2005). THREE INDEXES DURING CURRENT BULL MARKET
01 JAN 2005 = 1000
2000 1750 1500 1250 1000 750

SP 500

NQ COMP DJIA

JAN. 05

JAN. 07

JAN. 09

The foregoing material showed the NASDAQ Composite of today to be a more mature, more profitable, and slightly less tech-heavy index than it was 14 years ago. These changes lead directly to the questions: If the NASDAQ Composite was different than the other indexes in the past, is it still so today? Does it still warrant separate mention in the media and investors minds?

PERFORMANCE
A couple of graphical illustrations are useful. First, consider the Composite compared with the DJIA and S&P 500 before and after the tech bubble. Note that the following graph rebases all three indexes so they have a value of 1000 at the start of 1995.

During the bull market that preceded the financial crisis, and during the crisis itself, all three indexes tracked fairly closely. Since the start of the recovery in 2009, all three indexes have rebounded to precrisis levels, and then continued to grow. However, the Composite, has clearly grown faster since the trough, indicating some level of differentiation. So, while the Composite has tracked the other indexes more closely than during the tech bubble, there is still some differentiation today.

LONG-TERM PERFORMANCE CHARACTERISTICS

For assessing the long-term characteristics of a set of indexes, it is important to consider a time frame long enough to span the tech

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JAN. 13

NASDAQ COMPOSITE VS. OTHER BROAD INDEXES

500

bubble/bust and the financial crisis of 2008. The following table provides information on the Composite along with four other broad indexes over a 24-year period, starting in 1990. Included in the list of alternative indexes is the NASDAQ-100. TABLE 12: PERFORMANCE STATISTICS SINCE 1990
METRIC AVG ANNUAL PRICE RETURN AVG ANNUAL TOTAL RETURN STD DEV DAILY PRICE RETURNS CORRELATION W/ COMP CURRENT MKT CAP ($T) NQ COMP 9.58% S&P 500 7.03% DJIA NQ 100 RUSSELL 3000

chart illustrates the correlation of returns between the NASDAQ Composite and the other alternatives. It shows, for a date indicated on the horizontal axis, the correlation between daily returns on the Composite and the alternative for the previous 12 months. The correlation is therefore a rolling measure showing how it has evolved over the years. (Recall that a correlation of one would mean two indexes move in perfect lockstep, while correlation of zero means there is no relationship.) ROLLING CORRELATION OF DAILY RETURNS WITH NQ COMPOSITE
TRAILING 12 MONTHS
1.0 0.9 0.8 0.7 0.6

7.64% 12.18% 7.35% N/A 1.16% 0.89 $21.50

10.22% 9.41% 10.43% 12.65% 1.52% 1 $6.50 1.16% 0.87 $17.10 1.10% 0.78 $4.70 1.80% 0.97 $4.10

SP 500 NQ 100 DJIA RUSSELL 3000

The table provides two measures of average return: those based on prices only, and those that include dividends (assumed invested into the index). During this time frame, the NASDAQ-100 provided the highest average return, both in terms of price returns as well as the total returns. Note the relatively large difference in price and total return for the DJIA, due to a comparatively large dividend yield for DJIA components. In terms of short-term price risk, the two NASDAQ indexes have exhibited higher volatility than the others. Given what has been covered in this paper, this result is not surprising. Indeed, in the specific case of the NASDAQ-100 index, one can see the exceptional growth opportunities that were available during this time frame, albeit at the price of higher risk. In terms of correlations of daily returns we see the expected very high correlation between the Composite and its close sibling NASDAQ-100. We see much less correlation with the other broad indexes, particularly with the DJIA. Again this is not unexpected as the NASDAQ Composite and the DJIA may be considered largely at opposite ends of the spectrum: the DJIA representing mature blue chips, the NASDAQ Composite young growth companies. (Recognizing, though, that the DJIA contains three NASDAQ stocks: Microsoft, Intel, and Cisco.) The table also shows the current market cap coverage of each index, showing the comparatively small coverage of indexes like the DJIA and NASDAQ-100. The Russell 3000 essentially covers the totality of the US equity market, thereby allowing one to compare the various indexes against the entire market. While these performance statistics provide interesting historical perspective, their forward-looking value may be limited due to the changing nature of the NASDAQ Composite as documented above. Consider for example the correlation of daily returns. The following

0.5 0.4 0.3 JAN. 91 JAN. 94 JAN. 97 JAN. 00 JAN. 03 JAN. 06 JAN. 09 JAN. 12 JAN. 12 JAN. 14 JAN. 14 | 7

The graph shows, not surprisingly, a high correlation between the NASDAQ Composite and the NASDAQ-100. There is much less correlation with the other indexes, particularly during the 1990s. The peak of the tech bubble in 2000 marked a point of relatively low correlation with the DJIA. Since that time, the correlations with the NASDAQ Composite have increased. During the financial crisis, correlations were quite high. During the following recovery and bull market, correlations have fallen a bit, particularly for the DJIA. The next chart shows annualized daily return standard deviations, again using the same trailing 12-month method as the previous chart. ROLLING ANNUALIZED RETURN STANDARD DEVIATION
TRAILING 12 MONTHS
70 60 50 40 30 20 10 0 JAN. 91 JAN. 94 JAN. 97 JAN. 00 JAN. 03 JAN. 06 JAN. 09

SP 500 NQ COMP NQ 100 DJIA RUSSELL 3000

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During the 1990s, the two NASDAQ indexes were clearly more volatile than the others, particularly during the tech bubble and its aftermath. Since that time, there has been greater uniformity in volatility. For example, the uniformity increases during the financial crisis impacting all the indexes. Consider now three dimensions on which the Composite can be compared with the other broad indexes: industry orientation, company age, and current valuation metrics. Significant differences between the NASDAQ Composite and the other indexes remain. The first is a comparison of industry orientation, as measured using the GICS system. TABLE 13: MARKET CAP BREAKDOWN BY GICS SECTOR PCT OF MARKET CAP GICS SECTOR INFORMATION TECHNOLOGY CONSUMER DISCRETIONARY HEALTH CARE FINANCIALS INDUSTRIALS CONSUMER STAPLES TELECOMMUNICATION SERVICES ENERGY MATERIALS UTILITIES NQ COMP 46% 20% 15% 7% 4% 4% 2% 1% 1% 0% S&P 500 18% 13% 13% 16% 11% 10% 2% 10% 3% 3% DJIA 19% 13% 10% 16% 20% 8% 3% 9% 2% 0%

TABLE 14: INDEX-WEIGHTED MEDIAN YEAR OF FOUNDING INDEX NQ COMPOSITE NQ 100 S&P 500 RUSSELL 3000 DJIA YEAR 1985 1984 1958 1968 1908

The NASDAQ Composite (and NASDAQ-100) exhibit higher valuation multiples than the other indexes. Composite components continue to pay fewer dividends, and are a bit less profitable than components of the other indexes. These metrics are consistent with the idea that the NASDAQ Composite is more representative of the growth sector of the economy. In sum, there is no doubt that the differences in the NASDAQ Composite and other broad indexes are not as substantial as they were during the height of the tech bubble 14 years ago. The NASDAQ Composite, however, continues to differentiate itself as the home to companies that are younger and more growth oriented.

DATA SOURCES
The data used in most of the analyses presented in this paper are from various internal NASDAQ OMX sources. NASDAQ OMX maintains detailed information on its listings. It also maintains extensive databases of pricing information for individual securities and indexes.
Tables 9 and 13 use Standard and Poors GICS sector classification as provided by Bloomberg. Tables 10 and 11 use valuation data provided by Bloomberg. The average price and total return values in Table 12 are provided by Bloomberg. The results in Table 14 are based on data provided by FactSet Data Systems. Data used in the charts and elsewhere in this paper are from internal NASDAQ OMX sources, Bloomberg, FactSet, or Yahoo Finance.

The NASDAQ Composite continues to stand out for its high representation in the IT sector and low representation in other sectors, such as Industrials, Energy, and Utilities. While we have seen that tech-heavy is perhaps less appropriate than it was in 1999, the term still fits when comparing the NASDAQ Composite with other broad indexes. Consider now company age. FactSet Data Systems provides the year of company founding for all US stocks. The following table provides weighted median founding years. For the NASDAQ Composite and S&P 500, market caps were used as the weighting. This means that for the indicated median, half of the market cap is from companies founded after that year, half before that year. For the DJIA, which is a price-weighted index, the weights are the closing prices of the index components (as of the end of 2013).

DISCLAIMER
NASDAQ ,and NASDAQ OMX, NASDAQ-100, NASDAQ-100 Index, NASDAQ Composite, NASDAQ Composite Index, and The NASDAQ Stock Market are all registered trademarks of The NASDAQ OMX Group, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither The NASDAQ OMX Group, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding NASDAQ-listed companies or NASDAQ proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

 COPYRIGHT 2014. THE NASDAQ OMX GROUP, INC. ALL RIGHTS RESERVED. NASDAQ OMX AND NASDAQ ARE REGISTERED SERVICE/ TRADEMARKS OF THE NASDAQ OMX GROUP, INC. Q14-0618