The current strength of the technology sector, which lately has been powered by companies with significant exposure to artificial intelligence, has some investors thinking about the first tech boom and subsequent bust, but Mark Marex, Senior Director of Index Research and Development at Nasdaq Indexes, says the comparisons mostly do not hold. “It was a very unique time in the history of the index,” he says of the dot-com era.

It’s difficult to find reliable data on index valuations from the late 1990s since Nasdaq maintains access to data that only goes back to about 2001, Marex says. However, news reports at the time showed some price-to-earnings ratios for the index as a whole reached as high as 200 or more.

“We've not come anywhere remotely close to that type of an environment,” he says. Even after the onset of the COVID-19 pandemic, which increased some technology stock valuations higher and pushed index valuations closer to 40, those lofty modern P/E ratios were significantly below the dot-com era valuations.

Technology and what Marex calls the “new economy” holdings that make up the Nasdaq-100, have evolved from being a niche part of the overall stock market to a major force. Marex says looking at the S&P 500 index, Nasdaq-100 companies represented about 10-15% of the index market cap throughout much of the 2000s. It has averaged closer to 50% in recent years. “The Nasdaq-100 is such a substantial part of the US equity market that you can almost think about it now as a core holding,” Marex says.

As markets rise in value, smaller futures contracts allow a wider range of market participants to use the product for investing, hedging or other purposes in a very liquid backdrop. Benchmarks, too, are changing as technology becomes even more embedded into the U.S. economy, so it changes how investors think about hedging and risk management.

Choices matter, whether it’s the type of benchmark or the size of a contract, says Tim McCourt, senior managing director, global head of equity and foreign exchange products for CME Group. As an example, he pointed to the material difference between how an investor manages risk between the S&P 500 and the Nasdaq-100. The launch of the Micro E-mini contracts across the four major equity index benchmarks five years ago also reflect those needs.

“Since launch, those contracts have done over 2.5 billion contracts of volume… the market wants more precision in their risk management, and they want easier access to trading vehicles,” McCourt said in a Nasdaq Trade Talks discussion.

CME Group’s licensing of the Nasdaq-100 index, and subsequent E-mini Nasdaq-100 contract, was one of the firms’ early partnerships. Combining the strength of the two entities has been the secret to the partnership’s success, McCourt says. 

He points to Nasdaq’s leadership in initial public offerings and ability to create a global benchmark, and CME’s ability to build liquidity and unlock capital efficiencies in derivatives markets as “something that's really powerful and has served the community for decades, and hopefully decades to come as well.”

Because the Nasdaq-100 is largely (but not exclusively) focused on the U.S. economy, U.S. investors may only think about it domestically, but it’s a global benchmark, and the E-mini Nasdaq-100 is a global trading vehicle, as well, McCourt says. 

“We're continuing to see outsized growth outside of the U.S. From a trading hour perspective, almost 500,000 micros per day are from outside the U.S. From a trading hour perspective, we look at the participation. It's very diversified in terms of segments, as well as regions across the globe. And what we're seeing is, as people get familiar with the E-mini, the Micro E-mini, the Nasdaq options, they're now adopting all the other sort of varietal of products that we have similar to the other indices as well. All these things are great growth drivers for the Nasdaq-100,” McCourt says.