The Betashares Nasdaq 100 ETF (ASX: NDQ) has been a strong-performing exchange-traded fund (ETF) for both the short and long term. However, after its impressive rise, I'm questioning whether the fund is overvalued or fair value.
As we can see on the chart above, the NDQ ETF delivered a total return of 27.1% over the 12 months to September 2024. Even more impressively, over the five years to September 2024, it returned an average of 20.5% per annum.
Of course, past performance is not a reliable indicator of future performance. But it is impressive how well it has done for so long.
The US share market has been a great place to be invested. But now the question is – is the NDQ ETF still a good investment today?
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Elevated NDQ ETF valuation
One of the easiest ways to assess the valuation of an ASX ETF or individual company is to look at the price/earnings (P/E) ratio. That's the multiple of the earnings the valuation is trading at.
The higher the number, the more expensive it appears at face value.
According to BetaShares, the NDQ ETF has a forward P/E ratio of 26.2. A forward P/E ratio is the current valuation compared to estimated earnings for the upcoming result rather than the latest historical result.
Compared to a market like the S&P/ASX 200 Index (ASX: XJO), the NDQ ETF's portfolio holdings are also growing earnings at a faster rate.
Investors are usually willing to pay a higher P/E ratio if they expect solid earnings growth.
I'm going to use an earnings statistic from Vanguard for some of the analysis. While the Betashares Nasdaq 100 ETF is different to the Vanguard US Total Market Shares Index ETF (ASX: VTS), both funds have significant exposure to the same businesses, so I think they're comparable.
In its monthly update for September 2024, Vanguard advised that the VTS ETF had an earnings growth rate of 17.7% and a P/E ratio of 26.2.
What that tells me is that the businesses within the NDQ ETF are growing earnings at a strong rate. A P/E ratio of 26 doesn't seem excessive if earnings are growing in the high teens. I'd only call the NDQ ETF expensive (on a long-term view) if the P/E ratio figure was double the earnings growth rate figure.
But, these companies will need to keep growing to justify the higher price that investors are now paying.
Great businesses to keep performing?
Many of the companies in the portfolio have been delivering growth for shareholders for many years.
While there are 100 businesses within the NDQ ETF, it's weighted towards a few global leaders. At the end of September 2024, these were the biggest weightings:
- Apple (9% of the portfolio)
- Microsoft (8.2%)
- Nvidia (7.6%)
- Broadcom (5.3%)
- Meta Platforms (5.1%)
- Amazon.com (5%)
- Alphabet (4.9%)
- Tesla (3.2%)
- Costco (2.6%)
If there is to be a new advancement in AI, cloud computing, smartphones, virtual reality, automated cars or other areas like that, I think at least one of the NDQ ETF's stocks will be at the forefront of that change. This could then help their earnings grow further.
The NDQ ETF is certainly not cheap today, but I wouldn't call it overvalued. I still believe the Betashares Nasdaq 100 ETF will be able to keep rising in the long term due to the high likelihood that these companies can keep growing earnings.
