Under the Spotlight AUS: Betashares Nasdaq 100 ETF (NDQ)

Is it time to buy the dip?

That’s the tough question confronting investors in U.S. tech stocks who have watched the Nasdaq 100 Index slide 13% from its record close on 19 February. The abrupt shift in sentiment has savaged the share prices of former high flyers: Tesla ($TSLA) has slumped 50% since December, while Nvidia ($NVDA) is down 23% from its January peak. 

This means stormy weather for the Betashares Nasdaq 100 ETF ($NDQ). The popular ETF largely mirrors the performance of the Nasdaq 100 Index – which in turn tracks non-financial stocks listed on the eponymous exchange. It’s a change of pace for an ETF that rode the tech boom and delivered a very healthy average annual return of 20.9% over the past five years. It charges a 0.48% management fee and makes a twice yearly distribution. 

This correction comes mostly from increased concerns that Trump’s trade war may spark a recession. But does this open an opportunity to buy stocks that offer superior earnings growth? Some respected investors say yes, arguing this week’s sell-off has been an overreaction. However, others are waiting for more clarity on Trump’s tariffs, which will particularly affect U.S. tech stocks that source chips and components from overseas suppliers.  

While investors debate the next move, history suggests investing in tech can pay off over the long term. At the end of 2024, the Nasdaq 100 was up approximately 20,000% since its inception in 1985. That translates to a 14.25% compound annual return, compared to 11.57% from the S&P 500 over the same time. Having said that, as you know from the small print, past performance is no guarantee of future performance. 

Reality check

The pullback in U.S. tech stocks shouldn’t come as a huge surprise given their hot run over the past couple of years. The Nasdaq 100 rose 25% in 2024 after a massive 53% rally in 2023. The past few months have been uncomfortable, but long-term backers of U.S. tech stock exceptionalism have little to complain about: they’re still up big.

Hefty valuation multiples dogged the tech sector across the second half of 2024. While earnings growth has been strong, valuations that adorned US$1t+ companies with forward price earnings multiple of 30x-40x left little room for error. This was compounded by tech stocks becoming an overcrowded trade as FOMO and TINA took hold. Leading banks like Goldman Sachs warned that market concentration was an issue: the massive gains of the Magnificent 7 meant the top 10 U.S. stocks accounted for 36% of market cap (compared to a 20% average over the past few decades). So when the sell-off eventually came, it would be unpleasant.

Valuations have been plumped by the surge in AI interest. AI flagbearer Nvidia nearly doubled between April and November last year, from bets on huge demand for its Blackwell chips. The AI vibe was amplified by the big licks of capital committed by Google ($GOOG), Meta Platforms ($META) and Microsoft ($MSFT) to AI infrastructure. The US$500b Stargate investment by OpenAI, Oracle ($ORCL) and Softbank ($SFTBY) brought the AI buzz to peak levels… Then DeepSeek happened. The Chinese developer’s comparable and cheaper large language models cast doubt as to whether the big spend embraced by U.S. big tech was justified, sparking a 17% slump in Nvidia shares on 27 January.  

Tech stocks have also been caught in the crossfire of President Donald Trump’s trade war, leading to where we are now. Tech’s global exposure used to be one of its selling points – Nasdaq 100 stocks generate around half their revenues outside the U.S. – but the flipside is a reliance on supply lines from the likes of Taiwan, China and Mexico to build the cutting-edge products consumers (and investors) love. U.S. tariffs threaten to reshape this supply chain. Hedge funds concerned by a tariff-induced recession have trimmed risk at the fastest pace in two years. Given tech stocks are the biggest holdings in many portfolios, this risk aversion has added downward pressure on tech stocks. 

Bargain hunting

The stumble is a reminder that growth investing isn’t for the faint-hearted. Long-term supporters know that investing in tech comes with the potential for big drawdowns in stock prices: they've been here before. The Nasdaq 100 Index fell around 13% between July and August 2024. It fell around 35% between November 2021 and October 2022. After both drops, it rallied to new highs. Meta lost three quarters of its value between September 2021 and November 2022, only to rally more than 500% off those lows. 

The present pullback has been more about the P (price) than the E (earnings). Valuations are now looking more reasonable when compared to forecast earnings growth. While estimates for calendar year 2025 have been trimmed, the information technology sector is still expected to produce the strongest growth in revenue and earnings: 19.7% (pared back from 20.9% at the start of the year, according to FactSet). 

The Betashares Nasdaq 100 Index has around half of its portfolio in stocks classified as info tech. Its third largest position, at 7%, is Nvidia. According to Melius Research, $NVDA is now trading at 24x times forward earnings – this is around 40% cheaper than ChatGPT when it made its debut in 2022. About 15% of $NDQ’s holdings are in communication services. This sector is expected to produce the fourth strongest earnings growth in 2025: 12.2%. 

News flow

Earnings estimates and market sentiment will be driven by news flow over coming weeks and months. A big test will be Nvidia’s AI conference that starts this week (17-21 March). The pressure is on CEO Jensen Huang to deliver when he presents the keynote speech on Tuesday. He's expected to outline what’s next in agentic AI (the hottest trend in tech right now), robotics and accelerated computing. The event is a vital opportunity for Huang to calm restive investors and potentially set the tone for the broader tech sector, which will have a busy year.

Apple ($AAPL), the largest position within $NDQ, is rolling out AI on its iPhones. Investors will be keen to see whether this can lift sales in China, where the company slid to third place last year due to the lack of AI features. The launch of the iPhone 17 in December should provide another sales boost – it’s expected to have a bigger display, improved performance and an enhanced camera.

Meta believes this will be the year an AI assistant reaches more than a billion people – and CEO Mark Zuckerberg expects Meta AI to be the one. With 700m monthly active users, it’s already more widespread than all other assistants. AI will be at the forefront of the Meta Connect conference in September. 

There are also potential macro tailwinds in the offing. The Federal Reserve has paused U.S. interest rate cuts, but more monetary easing may come later this year. Next week’s meeting of the central bank will coincide with the release of its latest Summary of Economic Projections, which may highlight whether there’s any nervousness about a possible recession. The U.S. Congress will also consider an extension of the tax cuts implemented in the first Trump administration. There’s also hope that Trump’s fiery trade rhetoric may subside if deals can be cut that deliver some of what he wants without totally upending the global economy. 

Signal vs Noise

The reversal of fortune in U.S. tech stocks has been abrupt. The stumble from leaders to laggards lays partly in valuations that ran a little too hot amid the enthusiasm for AI. 

$NDQ still offers a diversified way to invest in big tech, and the data shows that backing innovation may deliver over the long term. At least for those with intestinal fortitude and a willingness to cop a few bumps and bruises along the way. It's a shame that, unlike gen AI, investors can't quite predict what comes next based on learned history.

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.