The Nasdaq Composite recently reached a record high for the first time since falling into a bear market in late 2021. That means the technology-heavy index is officially back in bull market territory, a milestone usually followed by significant gains across the stock market.
The "Magnificent Seven," especially Nvidia, Meta Platforms, and Amazon, played a major role in pushing the Nasdaq to a new record high, and all seven could perform well during the new bull market. However, rather than buying each stock individually, investors should consider buying an index fund that tracks the entire Nasdaq, such as the Fidelity Nasdaq Composite ETF (ONEQ +0.01%).
Doing so reduces risk by spreading money across more stocks and has historically been a sound investment strategy. This ETF would have turned $375 invested monthly into $953,800 over the last three decades.
The Fidelity Nasdaq Composite ETF provides heavy exposure to technology stocks
This ETF is a growth-focused index fund that invests in more than 1,000 stocks, primarily large caps. Its constituents span all 11 market sectors, but its allocation skews heavily toward the information technology (49%), communications services (14%), and consumer discretionary (14%) sectors.
Notably, the Magnificent Seven stocks are the seven largest positions in the Fidelity Nasdaq Composite ETF, accounting for about one-half of the index fund by weight. But they're not the only heavily weighted stocks -- the 10 largest positions are listed below.
- Microsoft: 11.8%
- Apple: 10.8%
- Nvidia: 7.5%
- Amazon: 7.1%
- Alphabet: 6.2%
- Meta Platforms: 4.2%
- Tesla: 2.5%
- Broadcom: 2.3%
- Costco Wholesale: 1.3%
- Advanced Micro Devices: 1.2%
I mentioned that the Fidelity Nasdaq Composite ETF is less risky than buying the Magnificent Seven stocks directly because it provides greater diversity. However, that doesn't mean the index fund is a low-risk investment.
As shown above, the 10 largest holdings account for about 55% of its weighted exposure. That concentration has made the index fund a very volatile investment in the past. For instance, its largest drawdown in the last three years was 36%, but the largest drawdown in the more diversified S&P 500 (SNPINDEX: ^GSPC) was just 25%. Investors should count on similar volatility in the future.
The Fidelity Nasdaq Composite ETF has been a rewarding long-term investment
Volatility notwithstanding, this ETF has been a phenomenal investment over the last three decades. The index fund returned 1,930% during that period, compounding at 10.55% annually.
Several secular trends contributed to that explosive growth, including e-commerce, cloud computing, and mobile phones. More recently, artificial intelligence (AI) has been a significant growth driver and promises to remain a powerful tailwind for the foreseeable future.
Going forward, investors can reasonably expect average annual returns of roughly 10.55% in the Fidelity Nasdaq Composite ETF. I say that because its performance over the last three decades encompassed enough different market environments -- from economic booms to recessions -- to provide a sensible barometer for future results. At that pace, $375 invested monthly in the index fund would be worth $79,200 in one decade, $305,900 in two decades, and $953,800 in three decades.
Of course, some investors may not have $375 per month, and other may prefer to save more. To that end, the chart below illustrates how different monthly contribution amounts would grow over time.
|
Holding Period |
$250 per Month |
$300 per Month |
$450 per Month |
|---|---|---|---|
|
10 Years |
$52,800 |
$63,400 |
$95,100 |
|
20 Years |
$203,900 |
$244,700 |
$367,100 |
|
30 Years |
$635,900 |
$763,100 |
$1.1 million |
Data source: Investor.gov compound interest calculator. Figures shown above assume an annual return of 10.55%. Dollar amounts have been rounded down to the next $100.
The Fidelity Nasdaq Composite ETF carries a below-average expense ratio of 0.21%, so the annual fee on a $5,000 portfolio would be $10.50. Ultimately, it would be hard to find a cheaper index fund with a better track record, but investors should be comfortable with extreme volatility before purchasing shares.
