Since its inception, NCX has outperformed the Nasdaq Composite as of Mar. 10, 2023 by a whopping 13.7%.
This performance is exceptionally good, as we expect an average yearly outperformance of 9.4% for the NCX vs. Nasdaq Composite, which has already been significantly exceeded.
How can one explain this extraordinary outperformance?
Patents are early stage innovation indicators. In contrast to R&D expenses they – and in particular their value - reflect the outcome of R&D activities, not their cost. The positive correlation between a company’s patent portfolio value, it’s development over time and the company’s success in the market, represented e.g. by the patent owners stock price development was already proved before in single investigations.
Our own calculations, e.g. using the equalweighted portfolios of the MSCI World Index, show that stocks with patent value > EUR 10 million perform significantly better (blue line) than the benchmark (grey line), and stocks with 0 < patent value < EUR 10 million (red line) perform worse than the benchmark:
What does this have to do with the NCX Index?
Based on the Nasdaq Composite (minus Nasdaq 100 (NDX) and Nasdaq Next Generation 100 Index (NGX) stocks), the NCX uses the 200 stocks with the largest patent value relative to their market cap.
If one compares the total patent value of the NCX with that of another small and midcap index, e.g. the Russel 2000 Index, one finds that the NCX with its 200 shares accounts for approx. 87% of the patent value (i.e. innovation power) of the Russel 2000. This means that the NCX has almost the same patent value as the Russel 2000 and that with only one tenth of the shares. We are convinced that this extremely high innovation power of the companies in the NCX is responsible for its exceptional outperformance.
Explanation of Nasdaq’s Innovators Completion Cap Index (NCX) based on our patent key indicator below.
Comparison of the patent values of Russel 2000 with the NCX Index, from 6:09 onwards:
The related ETF was issued last month from invesco with the ticker QQQS. Video from Ryan McCormack explains it well (embedded on the site)