The NASDAQ vs The Dow

At the end of November last year, I wrote a post comparing the NASDAQ and the Dow and suggested that the NASDAQ was a much better place to be investing than the Dow. Of course, to some extent, I was talking my own game because the kinds of companies we invest in most often end up trading on the NASDAQ if they go public. The NASDAQ is full of venture backed success stories and the Dow is full of tired old multinational companies that are "too big to fail".

But this evening I decided to go back and look at how the two indices have fared since I wrote that post. Here's the chart:
Dow vs nasdaq

In the four and a half months since I wrote that post, the NASDAQ has been up 6.2% and the Dow has been down 8%, for a net spread of 14.2%.

Now first I will say that I did not put on a trade to go long the NASDAQ and short the Dow when I wrote that post so shame on me. And further, this could all unwind in the coming months and not last.

But I think otherwise. I believe the NASDAQ has many companies that are worth investing in and owning and the Dow has many companies that aren't. If I had to bet, and like last November, it's unlikely that I will, I'd bet that the NASDAQ will continue to outperform the Dow for some time to come.

I also believe that we will see the return of an active IPO market this year. We've already seen one IPO, ChangeYou, a chinese online games company, and I think we'll see at least a few more in the coming months.

The NASDAQ is down 60% this decade and the Dow is only down 40% this decade. And yet, the NASDAQ has way more companies that are built for the 21st century than the Dow does. That's a recipe for outperformance in my book.


Comments (Archived):

  1. cj

    ***The NASDAQ is down 60% this decade and the Dow is only down 40% this decade.***That’s if $1 in 2000 was equal to $1 in 2009….I wonder what the loss is when you factor in the debasement….ouch!

  2. pedalpete

    I’m curious as to why you think this year will be an active year for IPO’s? And what do you define as ‘active’?Are international companies not threatened by Sarbanes Oxley?

    1. fredwilson

      Sarbox sucks but it is well understood now and can be dealt withObviously we’d love to see it amended and fixed which could be done since we know its issues nowAs for what an active year would be, I’d take one a weekThat would be great

  3. MattCope

    I’ve recently been thinking a lot about how entrepreneurs and VC’s should view equity risk in their portfolios – this post looks like a good opportunity to ask about your thoughts.I assume you have plenty of equity exposure via your firm’s carry, and many entrepreneurs have plenty of equity exposure via their own companies. How should entrepreneurs and VC’s look at this equity risk in the context of a broader portfolio?Do we sock away the rest of our capital into less risky assets given our private equity exposure? Do we treat private equities and public equities as different asset classes? Do those that know the tech world well heavily in NASDAQ components whose business models they grasp?(Please understand that I don’t intend to solicit investment advice – rather, I’m curious about your philosophy with respect to private/public equity exposure.)

    1. fredwilson

      My public stock invesments represent a very small part of our net worth. Its “play money” that helps me stay current with what is going on in the public marketsI use a “barbell” strategy with most of my net worth in our firm and our portfolio of venture investments and the rest in “risk free” assetsI also own a lot of real estate but that’s a different story.

  4. Bertil

    The two lines seem surprizingly ‘parallel’ (day to day correlated) to me: that’s quite unique to the period, isn’t it? I would interpret it as saying that most financial news were about the entire economy: crisis and general market — and that this is how investment decisions were made: based on global circumstances. Because innovation appears to be the only way out, that perception justifies the gap more then any other interpretation, but it’s not you, as a VC, that sees it from traders’ agreegated behaviour, but traders who trust your peers, based on their understanding of the economy.Please note that I agree with you all — I want to — but one has to realise it doesn’t have to be this way: war has ended more crisis then state-sponsored industrial revolutions have.

  5. Jens

    Fred, your principle assumption is correct in that the DOW is the ‘old’ US companies and that younger companies will outpace them.But your thinking is also too narrow. NASDAQ is not the new frontier. Compare DOW and NASDAQ with Chinese stocks and it will blow your head off. For example, do the exact same chart as you did above and include an ETF that tracks Chinese stocks, for example this one: NYSE:FXIFXI outperforms NASDAQ by the same extent that NASDAQ outperforms the DOW. Makes for some pretty interesting thinking.

    1. Paolo

      Well, I think Fred was focusing more on the two main US indexes, but yes, of course FXI and also EWZ outperformed the NASDAQ, as a few others, I suppose (chart here). Go Brazil! 😉

    2. fredwilson

      TotallyI just don’t know enough about Chinese companies to invest in them

  6. ErikSchwartz

    If you factor out BofA, GM, JP Morgan, and Citi how does the Dow look?With only 30 stocks a few real dogs can really mess things up.

    1. fredwilson


  7. Ashu Joshi

    The issue may need a deeper analysis. The DOW, if I am not mistaken is price-weighted calculation. The index may not be reflecting what is actually going on. My 2c – the S&P 500 is a better index to take a pulse of the overall market. NASDAQ is adding to its diversity but is fairly tech-laden.