The Nasdaq Had A Good Run, But It’s Time To Say Goodbye — Here’s Why

The Nasdaq-100 has had a fantastic, even unprecedented, bull run since the turn of the century. Over the last 15 years, it has vastly outperformed the S&P 500 and the Russell 2000 — a testament to the dominance of technology stocks in the US markets.

Unfortunately, all good things must come to an end. In recent weeks, Nasdaq has made changes that are frankly disqualifying for index investors, potentially making it an unreliable store of value. As a result, I’m dumping them. Maybe you should, too.

Nasdaq sells out: Pundits have bemoaned changes made by Nasdaq to win over a crop of rising mega IPOs — SpaceX, OpenAI, and Anthropic. Among them is a new ‘express entry’ rule for Nasdaq indexes, which will require popular index funds likeQQQ

to buy into new listings. And with the questionable (think: trillion-dollar) valuations these unprofitable companies have, it feels like Nasdaq is essentially selling American investors as exit liquidity.

• We have to talk about the SpaceX IPO filing: It reported $4.69B revenue in the first quarter and a $4.38B net loss. Asking price? $2T!? I guess if you buy this, you should know by now that you’re not investing — you’re gambling.
• OpenAI and Anthropic are likely to be a similar story: Both companies are expected to seek trillion-dollar valuations this year as well, despite massive unprofitability and persistent questions about the viability of AI inference as a business.

The Price Was Set By The Wealthy

I think this is a real challenge to the passive ‘market cap weighted’ index strategy, which has become popular and commonplace in Americans’ 401(k)s and brokerages over the last two years. The price of these companies happened exclusively in the private market by wealthy people — and if you own a Nasdaq ETF, you’re essentially stuck buying it.

• The inclusion of one of these companies alone would cause massive distortions in the Nasdaq-100 and related ETFs — their valuations would fetch top positions in the index.
• It’s worth noting that none of the aforementioned would be eligible for inclusion in the S&P 500, which requires four quarters of profitability, along with other criteria.

TL;DR: I understand there is a lot of buzz and promise around the rising crop of ‘mega IPOs’ this year. I could maybe even understand if people would want a small position in them after they go public (for FOMO reasons, maybe). A top-five spot in my retirement fund, though? Be serious.

What do you buy instead? An S&P 500 fund could replace the Nasdaq-100, or a technology-specific fund likeXLK

could offer similar exposure at a lower expense ratio.