A Smart Beta Nasdaq-100 Index That Could Translate to an Outperforming ETF Strategy

The Nasdaq-100 has been one of the most popular passive investment strategies, tracking the 100 largest non-financial companies listed on the Nasdaq Stock Market and is weighed by market capitalization. However, critics have argued that the over concentration of an index’s top positions in a market cap-weighted methodology may leave investors open to potential risks. For instance, the top five stocks in the Nasdaq-100 include Apple (NasdaqGS: AAPL), Alphabet (NasdaqGS: GOOGL), Microsoft (NasdaqGS: MSFT), Amazon (NasdaqGS: AMZN) and Facebook (NasdaqGS: FB), which make up over 40% of the Nasdaq-100 Index.

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However, the new indexing methodology could help investors outperform the benchmark. Looking at back-tests, an equally weighted bottom 50 portfolio has outperformed the top 50 portfolio since 2001.

“The Nasdaq-100 Target 25 Index is a new, ‘smart‘ Nasdaq-100 Index that targets the under-valued bottom half of the Nasdaq-100. Our research shows that Free Cash Flow Yield (FCFE to Price) is one of the most effective factors to rank these stocks. Our equally weighted, Top 25 Free Cash Flow Yield stock portfolio provides excellent diversification and strong selection of securities from one of the best performing flagship indexes of the last decade, the Nasdaq-100 Index,” according to a Nasdaq research note.

For more information on ETF index methodologies, visit our indexing category.