The Betashares Nasdaq 100 ETF (ASX: NDQ) saw a very heavy fall in 2022. Of the big ASX exchange-traded funds (ETFs), it was one of the worst performers, dropping around 30%.
For investors who don't know, this fund owns some of the largest US businesses. Indeed, it's invested in 100 of the largest non-financial businesses listed on the NASDAQ. The NASDAQ is a US-based stock exchange, home to many tech companies.
Looking at the fund's holdings list, these are some of its biggest positions: Microsoft, Apple, Amazon.com, Alphabet, Nvidia, Tesla, Meta Platforms, PepsiCo, and Broadcom.
Why was 2022 so tough?
Collectively, technology shares had a rough time last year. The combination of high inflation and rising interest rates has had quite an effect on valuations. Not only can inflation hurt profitability through rising costs, it can also prompt central banks to lift interest rates in a bid to take some demand out of the economy.
So why do interest rates matter so much? Legendary investor Warren Buffett once said:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
In 2022, the US Federal Reserve took the interest rate from around 0% to above 4%, and more increases are expected in 2023.
Over the year, the Microsoft share price dropped almost 30%, the Apple share price fell 27%, the Amazon share price sank almost 50%, the Alphabet share price declined almost 40%, and the Tesla share price was whacked 65%.
Will 2023 be any better for the Betashares Nasdaq 100 ETF?
As a group of businesses, I think it's likely to be another volatile year as things go up and down as optimists and pessimists drive the action.
As to whether it's a positive year or not, I think will come down to two main elements.
First, interest rates. It seems that the US Federal Reserve collectively thinks that the interest rate will reach 5.1%, based on individual members' expectations.
There's also the risk that the interest rate could stay at that 5% mark for longer than the optimists are hoping for. Theoretically, share price valuations are meant to take into account not just the current interest rate, but where it will be in the coming years as well.
The boss of the US Federal Reserve, Jerome Powell, has promised to "keep at it until the job is done", so I wouldn't expect interest rate cuts any time soon. If the market is not taking this commitment fully into account, then it could be another tough year.
The other main element could be the actual profitability performance of the businesses in the Betashares Nasdaq 100 ETF.
Analysts are regularly assessing how much profit they expect businesses to make in 2023. If economic conditions are worse for a business than expected, its share price could take a dive. But, on the other hand, if profit performs better than expected, the share price could jump amid all the negativity. I think there will be a bit of both within the ETF's portfolio of companies.
Foolish takeaway
I think the Betashares Nasdaq 100 ETF can end up higher come December 2023. Sentiment may fall during the year, particularly if quarterly profit numbers start being disappointing. However, by the end of the year, I think interest rate rises will have paused and this will give investors some certainty, as well as interest rate cuts getting closer, whenever they happen.
