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Nasdaq Hits Record Mark 11,000: Can ETFs Rally Further?

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The year 2020 can be fully attributed to the Nasdaq, which crossed the 11,000 mark for the first time ever on Aug 6.The Nasdaq 100 has outperformed the Nasdaq composite with the former hitting the 11,267 mark on Aug 6 while the latter topping the 11,108-mark on the day. The latest gains in the index were powered by Facebook (FB - Free Report) (up about 6%), Apple (AAPL - Free Report) (up 3.5% on Aug 6). Notably, the index topped the 10,000 mark in early June.

Investors should note that after diving into a bear market in March, Wall Street made a strong comeback in the past four months on unprecedented stimulus both from the Fed and the government. The reopening of global economies has resulted in an uptick in activities that has produced some upbeat economic data points in recent weeks. This shows that there is considerable pent-up demand in the economy.

The tech-heavy Nasdaq index outdid others in the peak of the pandemic due to greater rallies in the technology sector or socially-distant stocks, and continues to outperform in recent weeks as there is a second wave of contagion. The index was the first to recover year-to-date losses, and the first to beat its February high (read: Tech Rally Helps Nasdaq Turn Positive for 2020: ETFs to Play).

Can the Index & Its ETFs Rally Further?

Investors should note that the latest Nasdaq rally can be credited to a few names. If Tesla is added to the big five tech companies (Apple, Microsoft, Amazon, Alphabet, Facebook), the group forms 49% of the Nasdaq 100 and about 41% of the broader Nasdaq index (which houses more than 2700 stocks), per an article published on CNBC.

So, the fate of the Nasdaq rally largely depends on the six behemoths – Google (up 10.4% YTD), Facebook (up 29.3% YTD), Microsoft (up 37.2% YTD), Apple (up 55% YTD), Amazon (up 74.5% YTD) and Tesla (up 256% YTD).

The CNBC article went on to point out that apart from the top six stocks, the other big components of the Nasdaq-100 are Nvidia, PayPal, Zoom and Netflix – each big beneficiary of social distancing norms.

Another COVID-19-themed stock vaccine maker Moderna (MRNA) has secured a place on  the Nasdaq in July. However, these five stocks make up only 6.9% of the Nasdaq-100, per CNBC (read: Expect Further Rally in Nasdaq-100 ETFs as Moderna Joins).

Favorable Zacks Rank of Major Components of Nasdaq

Investors should note that above-said components have favorable Zacks Ranks. Apple currently has a Zacks Rank #1 (Strong Buy), PayPal and Moderna have a Zacks Rank #2 (Buy) and Facebook, Microsoft, Alphabet, Tesla, Nvidia, Zoom and Netflix have a Zacks Rank #3 (Hold). This means more rally is in the cards for the tech-heavy index. Plus, majority of these companies came up with upbeat earnings this season.

Nasdaq is Richly-Valued, But Operating Backdrop Calls for More Upside

The Nasdaq-100 index is trading at its highest price-to-earnings multiple since 2004, according to FactSet, quoted on an article published on CNBC. Its multiple to revenue is at the highest since 2002, per the article.

“It’s a tale of a bifurcated market,” said Dryden Pence, chief investment officer at Pence Wealth Management, as quoted on CNBC. “You’ve got a few sectors that are doing well” amid the pandemic. Thus, with the Covid-19 threat still alive around the world, we expect more upside in the Nasdaq.

In any case, the sheer need, ease and worth of the technology-driven products and services has been felt amid the peak of the pandemic. So, the Nasdaq is going to rule ahead with or without coronavirus.  

ETFs in Focus

With expectations that the index will stay strong in the coming days, one can play the momentum with the ETFs like Invesco QQQ (QQQ - Free Report) , First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW - Free Report) , Fidelity Nasdaq Composite Index Tracking Stock (ONEQ - Free Report) , ProShares Ultra QQQ (QLD - Free Report) and ProShares UltraPro QQQ (TQQQ - Free Report) .

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