Key Points
Investing in index funds has long been viewed as a safe way to invest in the stock market. They can give you broad exposure to a wide range of stocks and help you diversify. One of the most popular ones on the Nasdaq exchange is the Nasdaq-100, which includes the top 100 non-financial stocks.
But with Space Exploration Technologies Corp (NASDAQ: SPCX), also known as SpaceX, recently joining the index, is that still a good one to track?
Why SpaceX joining the Nasdaq-100 can be a problem for investors
Tracking indexes can be ideal for passive investors who just want to buy and forget about their investments. But because indexes can change over time and rebalance, investors may not realize all of the stocks they have exposure to. And the Nasdaq-100 has gotten a bit riskier recently with the addition of SpaceX.
While SpaceX is a popular growth stock with retail investors, the company itself is unprofitable, incurring billions in losses, and that trend may not end soon as it invests heavily in space and artificial intelligence (AI). Meanwhile, with a market cap of close to $2 trillion, it’s trading as if it were a highly successful, profitable business, as is the case with other stocks at this type of valuation. Its high valuation makes it vulnerable to a significant correction once the hype and excitement wear off, and that could drag down investments that track the Nasdaq-100, such as the highly popular Invesco QQQ Trust (NASDAQ: QQQ).
Are investors better off avoiding the Nasdaq-100?
Tracking the top stocks on the Nasdaq hasn’t been a bad move for investors over the years, as the Invesco QQQ Trust has doubled in a span of five years, while the S&P 500 has risen by a more modest rate of about 72% over that time frame.
But that has been amid a flurry of excitement around AI in recent years, sending stocks to massive valuations in the process. That means many Nasdaq-100 stocks are going to be incredibly expensive right now, not just SpaceX. I wouldn’t consider tracking the index, despite its impressive gains in recent years, because over the next five years returns could look very different, and possibly even negative, given how highly valued many Nasdaq stocks are these days.
While it may be tempting to look at past results, they can give investors a false sense of security. With SpaceX and many other expensive stocks in the Nasdaq-100, a better move may be to track the S&P 500 or simply focus on more value-oriented stocks.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
