The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial securities listed on the Nasdaq Stock Market based on market capitalization. It is a modified capitalization-weighted index. The weightings of companies in the index are based on their market capitalizations, with rules capping the influence of the largest components. As of September 20, 2013, the three largest components of the index are Apple (comprises about 12.18% of the index), Microsoft (comprises about 7.72% of the index), and Google (comprises about 6.69% of the index).
The Nasdaq-100 was initiated on January 31, 1985 and quickly became one of the most widely-followed technology indexes during the dot.com bubble.
The chart below (click on the chart for a larger view) illustrates historical annual returns for the Nasdaq-100 index between the calendar years 1986 and 2012. The Nasdaq-100 Index does not account for dividend payouts, but the Nasdaq 100 Total Return Index, which was initiated on March 4, 1999, does account for dividends. The chart below calculated based on returns for (a) the Nasdaq-100 Index from January 1, 1986 - March 3, 1999; and (b) the Nasdaq-100 Total Return Index from March 4, 1999 - December 31, 2012.
As shown, the Nasdaq-100 soared during the 1990s, rising about 1850% between 1991 and 1999, an annualized gain of about 38.29%. Between 1986 and 1999, the Nasdaq-100 rose about 2704%, an annualized gain of about 26.89%. However, between 2000 and 2008 the Nasdaq-100 was one of the worst-performing U.S. stock indexes, dropping about 66.48%, an annualized loss of about 11.44%.
The Nasdaq-100 rocketed during the late-1990s as investors piled into technology stocks regardless of valuations. As of January 1999, the price/earnings (P/E) ratio of the Nasdaq-100 index was reportedly about 90.2 and topped well over 100 by the end of 1999 as the Nasdaq-100 rose over 102% during the year. After the dot-com bubble burst, the Nasdaq-100 plummeted about 83% between a peak on March 27, 2000 to a trough on October 7, 2002.
Many investors were burned when the dot.com bubble burst and have shunned technology stocks ever since. I personally fell into that camp myself until I reevaluated my position in 2009. Although the technology bear market that extended between March 2000 and October 2002 (or March 2009, the bottom of the financial crisis bear market) was painful, technology stocks now currently have lower valuations than non-technology stocks and are likely to outperform in the near future. For example, as of the market close on September 20, 2013, the Nasdaq-100 had a P/E ratio of about 21.19, which is probably close to 20% of what it was at the time of the Nasdaq-100 index's peak on March 27, 2000.
I have previously stated that I believe that the Nasdaq-100 is in the beginning stages of a multi-year bull market run as investors reconsider the potential of high tech companies.