Corporations such as Amazon, Apple and Microsoft are commonly known as “disrupters” because of their roles in upending the way we go about our daily lives. But what do these corporations have to do with annuities?
Game-changing modern-day industrials such as Amazon, Apple, Facebook, Intel and Microsoft are the backbone of the Nasdaq-100 index, which is built into 20 fixed indexed annuities across multiple carriers.
In a recent webinar, Efram Slen, the head of index research for Nasdaq Global Information Service, discussed the Nasdaq-100 index and its value to annuity clients.
But before he began his breakdown of the Nasdaq-100 index and how it relates to annuities, the president and CEO of a 35-year-old insurance marketing organization discussed the climate of the fixed indexed annuity marketplace over the past 15-20 years.
“The annuities of today are not the annuities our parents grew up with 30 or 40 years ago,” said Mark Williams, president and CEO of Brokers International. “The growth of the indexed annuity has been astounding over the past 15-20 years. Not only does it offer a client upside potential of market returns, with little to no downside risk, it also has changed the landscape of the annuity in general. Today, we are seeing an explosion of indexed annuities in the marketplace, and a lot of that growth is driven by the indices that are inside these products.”
When “Nasdaq” is mentioned in stock market news, what is really being reported is the Nasdaq Composite, which is an index of all the stocks listed on the Nasdaq Stock Market, Slen said. He described the Nasdaq Composite as the barometer of the Nasdaq exchange.
The Nasdaq Composite measures all common stocks — both domestic and international — listed among the more than 2,600 stocks listed on the Nasdaq stock market. The Nasdaq-100, whose index is built into annuities, comprises the 100 largest, nonfinancial companies listed on the Nasdaq stock market.
The Nasdaq-100, as Slen described it, is made up of disrupters, game-changers and forward-thinkers — also known as the new industrials.
“So many of these companies are impacting and changing the way we live our lives,” he said. “They are at the forefront of innovation.” The current value of related exchange-traded products among Nasdaq-100 companies exceeds $100 billion.
On The Cutting Edge
Why would an advisor who is recommending an FIA to a client want the Nasdaq-100 as that annuity’s index as opposed to another index, such as the S&P 500?
“With the Nasdaq-100, you are getting an increased exposure to companies that are on the cutting edge,” Slen said. “You are getting exposure to these companies in a higher weight and higher concentration.”
“The Nasdaq-100 is not made up of startup companies,” Slen said. “It’s pretty clear the Nasdaq-100 is made up of larger companies than the S&P 500 median. Nasdaq-100 brings all types of innovation and disruption, but largely in the large cap space.
Another key component of the Nasdaq-100, Slen said, is market cap.
Comparing the average, median and minimum market caps of the Nasdaq-100 and the S&P 500 between December 2007 and September 2019, the average market cap has been higher in the Nasdaq-100 than the S&P 500 in 10 of those years. The median market cap has been higher for the Nasdaq-100 than the S&P 500 in each of the past five years.
As of September 2019, the medians were $31.96 billion for the Nasdaq-100 and $22.51 billion for the S&P 500. The smallest company in the Nasdaq-100, at $9.5 billion, has been larger than the smallest company in the S&P 500, at $3.5 billion, for the past 11 years.
In addition to providing guaranteed lifetime income, what makes an FIA attractive to consumers is upside potential with minimal downside risk. FIAs protect consumers from market volatility, which has been a factor in the financial world over the past decade.
Looking at the Nasdaq-100 versus the S&P 500 over the past 10 or more years, both indexes have experienced volatility, Slen said. The Nasdaq-100 has been more volatile than the S&P 500 since 2008, because the Nasdaq-100 has a higher concentration of companies that are more volatile. But he noted the Nasdaq-100’s bottom 50 companies outperformed the index’s top 50 companies over the past 10 years.
Slen showed a comparison between the Nasdaq-100 and the S&P 500 on annual total returns, which reinvest dividends. The comparison showed the Nasdaq-100 total return outperformed the S&P 500 total return in 10 out of the past 12 years.
Consumer Services, Biotech
What is fueling the Nasdaq-100’s growth? The two main drivers, Slen said, are consumer services (companies such as Amazon) and health care (especially biotechnology companies).
The underlying story behind the rise in the Nasdaq-100 is that the U.S. economy’s growth is shifting from traditional industries such as metals and petroleum to new sectors such as e-commerce and technology.
Technology made up 60% of the Nasdaq-100 as of September 2019, and its 10-year sales growth was 84% as of the end of 2018. Consumer services and health care made up the second- and third-highest categories in the Nasdaq-100 and both sectors showed 57% sales growth in the 10-year period ending in December 2018.
The technology, health care and consumer services companies on the Nasdaq-100 also have had tremendous dividend growth and are poised for more dividend growth in the future, Slen said. Looking at the entire US equity space, technology has shown a 249% cumulative dividend growth since 2009, followed by financials at 153% and health care at 88%.
Although the Nasdaq-100 story has been one of growth, Slen said, the fundamental data behind that growth have drastically improved over the past decade despite a volatile economy. Earnings have skyrocketed, which shows how the companies on the Nasdaq-100 have matured as they increase revenues and reduce costs. Costs have been controlled, shares were bought back, dividends have increased and the price-to-earnings ratio has contracted.
Since 2003, the Nasdaq-100 had a compound annual growth rate of 20% in earnings, 12% in revenues and 25% in dividend value while experiencing an 11% drop in price-to-earnings ratio.
“The shift in fundamentals has resulted in significant outperformance over other U.S. large cap indexes,” Slen said.