The Betashares Nasdaq 100 ETF (ASX: NDQ) has proven to be a leading exchange-traded fund (ETF) over the past five years. So, will the good times continue? Or is this a case where past performance is not a reliable indicator of future performance?
Firstly, let's look at just how good it has been. In the five years to 31 January 2025, the NDQ ETF has returned an average of 21% per year. Not many fund investments have returned that much in the past five years.
The performance of the underlying holdings and the fees charged almost entirely decide an ETF's return.
The biggest holdings in the NDQ ETF have driven a significant portion of the overall returns. In the last five years:
- The Apple share price has risen by around 190%.
- The Nvidia share price has gone up approximately 1,700%.
- The Microsoft share price has climbed around 120%.
- The Amazon share price grew by around 120%.
- The Alphabet share price increased by approximately 150%.
- The Broadcom share price has risen by around 630%.
- The Meta Platforms share price has gone up roughly 230%.
- The Tesla share price has jumped around 600%.
With returns like that, it's no surprise that the NDQ ETF has done so well. But, can the fund continue to outperform, and is it a buy now?
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Pros of investing today
It's no accident that the fund has done so well. It's invested in 100 of the largest companies and tech giants on the US stock exchange, NASDAQ.
These companies have grown their underlying earnings significantly, and I believe they will continue to be among the winners for the foreseeable future.
Names like Microsoft, Alphabet, and Amazon are leaders in growth areas like cloud computing, AI, and e-commerce. I think there's a big growth runway for these companies with the ongoing global adoption of digitalisation, which is a strong tailwind.
The scale of these businesses allows them to achieve good profit margins and pleasingly add revenue to profit at an attractive rate. Profit generation is typically what drives share prices.
While all of these businesses are listed in the United States, many of the NDQ ETF's holdings generate a portion of their earnings from abroad, making them attractive global companies.
I think this fund is a great way to gain exposure to a significant portion of the global share market's market capitalisation without owning the 'average' companies.
The returns show how well the underlying companies have done, but I'm not expecting the next five years to be as good as the last five (of 20% per annum) unless AI success or another global-winning stock can emerge (like Nvidia did) and excite the market further.
Cons about the NDQ ETF
There are two potential negatives I'll point to.
First, the NDQ ETF has a significant allocation to technology businesses, which arguably makes it less diversified.
There are a few non-tech names in there, such as Costco, but the fund is tech-heavy. However, of all the sectors to get exposure to, tech is probably the best one. It wouldn't have performed as well without those tech names, so I think it has been a good thing and will remain so over the long term. The world is just going to become increasingly technological, in my view.
The second and biggest potential negative is the valuation. The large rise in the valuation means the price/earnings (P/E) ratio now looks relatively high.
According to BetaShares, the NDQ ETF had a forward P/E ratio of 26.3 on 31 December 2024. A higher valuation doesn't mean it can't keep doing well, but it does mean there are higher expectations of the businesses, and there is a little less upside than if the P/E ratio was 25 or lower.
I still think the NDQ ETF can be a good buy for the long term, but I wouldn't be surprised to see some volatility in the next few years because of the higher valuation.
