The term NASDAQ has a double meaning: it is not only the largest stock exchange in the USA, but also the name for a very important stock index, the NASDAQ Composite. The following article will discuss the existing related indices, their importance in the financial sector and why it is worth investing in NASDAQ in detail. We will tell you how such an investment works and how you can keep the cost of your NASDAQ investment low.
There are two important indices for NASDAQ: One is the NASDAQ Composite, the other is the NASDAQ-100, which lists the 100 most important companies from the NASDAQ Composite. Both indices are considered as very important barometers for the entire global stock market.
The NASDAQ Composite is a share price index that solely takes into account the share prices of the 3,000 companies included (excluding extraordinary income and profits from capital market measures). The companies are weighted according to their market capitalization. As a barometer, the NASDAQ Composite, together with the Dow Jones Utility Average, clearly shows the upcoming movements on the entire stock market through long-term highs or lows.
The NASDAQ-100 lists the 100 companies from the NASDAQ Composite that have the highest market capitalization (and are not financial companies because those are included in the NASDAQ Financial 100). The NASDAQ Biotechnology, which lists the biotechnological and pharmaceutical industries, is not as important. You can read more about the individual NASDAQ types and the companies and securities represented in them in our specialized article “Which companies are listed in NASDAQ?”
How can you invest in NASDAQ?
A stock index is of course not an investment product in itself, it is merely a rating number. However, there are funds that are structured analogously to the rating criteria of the index and therefore always perform exactly like the index itself.
What is the advantage of an ETF?
Scientific studies have already shown that funds, even with very good management, are hardly able to perform better than the index. One of the studies which shows this very clearly is even the work of a Nobel Prize winner.
For investors, this means that the overall performance of an index fund (ETF fund) is likely to be higher than that of other investment funds. Simultaneously, in most cases the losses are also limited to the losses of the index and are therefore likely to be lower than for other fund types, as indices usually recover very quickly after a downturn.
Is this always the case?
The answer is a clear no. Of course, it also depends very much on the structure of a fund which can vary a lot. A fund that replicates the exact structure of the index, including its weighting, is called “physically replicating” in technical terms. In practice, however, these are only very few index funds. The reason for this is the very complicated and expensive replication (after all, the NASDAQ has 3,000 stocks). Many funds therefore make use of so-called “sampling”. This involves using statistical methods to determine the securities that perform as similarly as possible to the index. The selection can be very limited, often using several hundred stocks less than in the index itself. Of course, this is not in the interest of the investor – but it is very much in the interest of the fund company. Therefore, you should always pay attention to the replication method and the fund composition before buying shares. Swap ETFs are another story. These funds are not replicating at all, but usually copy the index performance very accurately (i.e. with a very small so-called “tracking difference”).
What is the “counterparty risk”?
A counterparty risk arises whenever fund companies lend their securities to other market participants, for example for option transactions. If a large number of securities are loaned out and market participants speculate heavily, negative effects on the performing fund and in particular on the return to be achieved cannot be ruled out. For the investor, this also represents an (avoidable) security risk – only the fund companies make a profit from this anyway.
What else should be considered when making a choice?
Basically, the fund should of course meet your personal needs and requirements. For example in the domicile (i.e. whether it is a domestic or foreign fund), with regard to the tax aspects (caution, sometimes double taxation can be a threat!) and existing hedging. The currency in which the fund is invested also plays a role (it can gain or lose through currency differences). In addition, it can also make sense to invest through a savings plan – this often has cost advantages. However, this is not possible with every index fund.
The costs of index funds
For most index funds, the percentage total expense ratio is included. This indicates how much the fund incurs in terms of investment volume. These costs are usually expressed as percentage. Low-cost index funds range from 0.1% to 0.7% per year. With total cost shares of several percent per year, one should always take a critical look – after all, this can also cost a lot of one’s own profit.
The costs for an index fund also depend very much on the respective trading location and the broker. Discount and online brokers are usually much cheaper than banks, but there can also be considerable differences between individual brokers.
To illustrate this, we chose an example index fund on the NASDAQ and examined the costs for the fund at different brokers.
We have chosen the ISHARES NASDAQ-100 UCITS ETF (ISIN DE000A0F5UF5) as an example fund. Here are the key details of the fund:
- physically replicating
- currency USD (currency gains and losses possible)
- domicile: Germany
- expense ratio: 0.31 % p. a.
- no savings plan
- fund volume: 758,029,255.81
Costs at Captrader
The online broker Captrader charges volume dependent fees of 0.10% for ETFs. Trading venue fees are already integrated here, so no further fees will have to be paid by the investor. Account and custody account management are also free of charge.
Costs at OnVista
OnVista is currently offering an interesting offer for new customers (as of February 2016). ETFs always cost 5 Euro (volume independent) + additional 1.50 Euro trading place fees. For ISHARES ETFs, however, there is currently also an even more interesting offer that reduces the usual 5 euros to 2.95 euros. Since this price is independent of the volume, we find this a very interesting offer. If a savings plan were possible for our fund (which is unfortunately not in this example), there would be no fees if 50 to 1,000 euros were paid into the savings plan every month.
Costs at Heavytrader
ETFs on Heavytrader, as well as all shares traded on XETRA, cost a flat rate of 0.12% of the volume. This amount has a minimum of EUR 1.99, which must always be paid and is limited to EUR 69.90 so there will not be any higher costs. In addition, there are (very low) trading place fees.
Costs for individual shares
For Captrader and Heavytrader, individual shares via XETRA would generate the same fees as the ETFs. Only With OnVista, the ETF generates significantly less fees than with individual shares, also with the broker.
If you want to precisely compare the costs of your individual securities account with different brokers, it is best to use our extensive and up-to-date broker comparison calculator.