Why the BetaShares Nasdaq 100 ETF may have done better in FY22 than you thought

The price of the BetaShares Nasdaq 100 ETF (ASX: NDQ) went down in FY22. But amid the volatility, it may have done better than some readers expected.

Firstly, let’s acknowledge that the NDQ ETF did fall by around 20% in the 2022 financial year. That’s a pretty big drop in most people’s books.

However, that decline may not have been as much as people were expecting. Why?

Since the beginning of 2022, the BetaShares Nasdaq 100 ETF has actually fallen by close to 30%. That’s quite a bit worse than the drop for FY22.

The reason for the difference is that in the first six months of FY22, the NDQ ETF rose 16%. This resulted from investors pushing many of the large companies on the NASDAQ higher.

So, at the end of December 2021, NDQ had a higher starting valuation point to fall from than at the start of July 2021.

What drives the BetaShares Nasdaq 100 ETF?

The performance of any exchange-traded fund (ETF) is dictated by how the underlying holdings perform.

NDQ ETF owns shares in 100 of the largest businesses on the NASDAQ. Some of the biggest positions include Apple, Microsoft, Amazon.com, Tesla, Alphabet, Meta Platforms, Nvidia, PepsiCo, and Costco.

The businesses with the biggest weightings have the strongest influence. For example, at 1 July 2022, Apple had a 12.6% allocation and Microsoft had a 10.9% allocation in the NDQ ETF.

Why did the NDQ ETF fall?

The ETF itself simply tracks the share prices of the underlying holdings. So, the BetaShares Nasdaq 100 ETF dropped because the 100 businesses collectively declined in value.

Investors have been heavily focusing on inflation and what this may mean for interest rates and central bank decisions.

Various factors may have pushed up inflation, such as supply chain problems, financial support for economies during COVID-19, and soaring energy prices amid the Russian invasion of Ukraine.

Central bankers want to try to keep inflation within a target range, at a much lower rate than where it is now. One of their main tools to do this is to increase interest rates. The US Federal Reserve increased its interest rate by 75 basis points, or 0.75%, last month alone.

Why do interest rates matter for shares? Warren Buffett once said this:

The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature …its intrinsic valuation is 100% sensitive to interest rates.

However, despite the declines seen by the ETF, it is still up by over 100% over the past five years.