The Nasdaq stock exchange is associated with many of the biggest information technology companies in the world, and the USAA Nasdaq 100 Index Fund (NASDAQMUTFUND:USNQX) tracks the index that includes the 100 biggest non-financial stocks listed on the Nasdaq. Like the exchange-traded fund PowerShares QQQ (NASDAQ:QQQ), the Nasdaq 100 index fund aims to match the performance of its target benchmark, while keeping expenses as low as possible. By offering diversified exposure to 100 stocks, the Nasdaq 100 Index Fund makes a solid investment for investors who are comfortable with the risk of the market.
What is USAA Nasdaq 100 Index Fund's objective?
The investment objective of the USAA Nasdaq 100 Index Fund is to match, before fees and expenses, the performance of the stocks composing the Nasdaq 100 Index. To do so, the fund usually invests in the common stocks of the component companies in the index, but the fund also has the right to use other strategies with the remainder of its assets to help it match the Nasdaq's performance.
By choosing to track the Nasdaq 100, USAA believes that the fund has the ability to tap into the growth potential of promising technology, telecom, retail, and biotechnology stocks. The fund company sees the fund as a complement to the S&P 500 index, which has a broader mix that includes financial stocks while having less of an emphasis on technology.
What is the Nasdaq 100 Index Fund's asset allocation?
USAA Nasdaq 100 Index Fund has more than 95% of its assets invested in stocks, and the majority of those stocks are in the technology sector. Internet software and services make up about a sixth of the fund, with hardware storage and peripheral and retail internet also having double-digit percentage allocations. Semiconductors and systems software each have 8% to 10% allocations.
The remainder of the index fund's holdings is made up primarily of consumer and healthcare stocks. Because the index chooses the top stocks in the Nasdaq stock market, there's a strong bias toward large-cap stocks, with only 7% of holdings falling into the mid-cap stock universe.
How much does the fund cost?
One downside of the USAA Nasdaq 100 Index Fund is its relatively high cost. An expense ratio of 0.54% isn't all that high compared to stock funds in general, but among index funds, it's on the high side. The PowerShares QQQ ETF, by contrast, charges just 0.20% in its annual expense ratio.
How has USAA Nasdaq 100 Index Fund performed?
USAA Nasdaq 100 Index Fund has done a reasonably good job of matching its benchmark's performance. Its average annual total return over the past 10 years has been roughly 12%, which trails the index itself by about three-quarters of a percentage point. That's above its current expense ratio, but some of those years reflect periods during which the fund was smaller and likely had higher costs.
From a quarterly perspective, the Nasdaq 100 Index Fund has been volatile. During its worst quarter, the fund lost 36%, while its best quarter showed a 34% rise, both during the topsy-turvy year of 2001. Annually, the fund lost 42% in 2008 and earned a 53% return in 2009, following the ups and downs of the financial crisis.
Is Nasdaq 100 Index Fund right for you?
For those who like the idea of investing in the hottest stocks in the market, tracking the Nasdaq 100 has a certain appeal. By doing so, you can tap into cutting-edge investing themes like mobile and internet applications as well as the broader technology, biotechnology, and tech-enabled consumer-friendly portions of the market. Those areas have done well lately, and they should continue to lead the market ahead in terms of revenue growth.
That said, USAA Nasdaq 100 Index Fund isn't necessarily the best vehicle for investing in the index. Despite some of the advantages of mutual funds, including not needing to pay a commission, the high annual expense ratio is unnecessarily expensive. For most long-term investors, choosing a more inexpensive ETF like PowerShares QQQ will be the better option if you're seeking Nasdaq exposure.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has the following options: short January 2018 $114 puts on PowerShares QQQ Trust Series 1 and long January 2018 $125 puts on PowerShares QQQ Trust Series 1. The Motley Fool has a disclosure policy.