In the AI race, investors face uncertainty regarding which companies will emerge as winners and losers. Bank of America suggests that instead of betting on individual stocks, utilizing the momentum-friendly characteristics of the Nasdaq-100 Index (NDX) and its upcoming rule changes presents a superior strategy.
According to reports on March 11th, Bank of America stated in a recent research note that, given the high uncertainty surrounding AI winners and losers, the "survivorship bias" inherent in passively investing in the NDX is itself a major advantage. Since the launch of ChatGPT, the NDX has outperformed a static basket of its own components by approximately 6% annually, which is about double the similar excess return observed for the S&P 500 (SPX).
The report further indicated that proposed changes to the Nasdaq's index rules will structurally enhance the NDX's advantage over the SPX. Combined with expectations for a wave of large tech/AI unicorn IPOs, the NDX is positioned to continue outperforming the SPX in terms of both price performance and volatility metrics.
**Survivorship Bias: The Passive Investor's Hidden Benefit in Momentum Markets** In quantitative analysis, "survivorship bias" is often a pejorative term, implying an overestimation of future returns by focusing only on successful cases while ignoring failures. However, Bank of America points out that within a market-cap-weighted index system, this "bias" is actually a structural source of return for passive investors. Winners see their weights increase, while losers are gradually removed from the index, effectively making the index an automatic momentum-tracking mechanism.
Data shows that from the end of November 2022, when ChatGPT launched and the AI era began, until March 5th, 2026, the actual return of the NDX (25.1% annualized) exceeded that of a fixed basket of its components from the same starting point (19.4% annualized) by about 6 percentage points per year. The comparable excess return for the SPX was approximately 3 percentage points (17.2% vs. 13.9%). This means the contribution of survivorship bias to returns for the NDX was about twice that of the SPX.
Notably, during this period, the number of constituent changes was similar for both indices (around 60 additions/deletions each), but the total number of constituents in the NDX is only one-fifth that of the SPX (100 vs. 500). This implies that each constituent change has a more significant impact on the NDX.
**Proposed Nasdaq Rule Changes: Faster Inclusion to Amplify Tech/AI Concentration** The report states that in February 2026, Nasdaq formally proposed revisions to its index methodology. The core changes, all pointing towards enabling larger tech/AI newcomers to enter the NDX faster and with greater weight, include:
1. **Total Market Cap Eligibility:** Current rules consider only listed shares for market cap calculations. The new proposal would include a company's total market capitalization (including unlisted shares) for eligibility assessment, while retaining the use of listed and free-float market cap for weight calculation. 2. **Fast Entry Pathway:** Newly listed Nasdaq stocks could be included in the NDX as soon as 15 trading days post-IPO, bypassing current "seasoning" and liquidity requirements. In contrast, the S&P 500 requires four consecutive quarters of positive GAAP earnings for eligibility, a significantly higher bar. 3. **5x Weight Adjustment for Low Free Float:** New members with a free float below 20% will have their index weight calculated based on 5 times their free float percentage (capped at 100%). This means a company with only 9% of shares floated could have a weight calculation basis of up to 45% of its listed market cap. Additionally, the current 10% minimum free float requirement will be eliminated. 4. **Quarterly Exit Mechanism:** The current "10 basis point rule" (triggering exit if weight is below 10bp at the end of two consecutive months) will be replaced by a quarterly ranking system. Constituents falling outside the top 125 will be removed during quarterly rebalances, making the exit of underperformers more timely and predictable.
Bank of America estimates that assuming approximately $700 billion in passive assets directly track the NDX (about 2% of its total market cap), even a large newly public company with a very low float (below 10%) would see passive tracking funds become a significant source of buying pressure for its stock.
**Large AI Unicorn IPOs: Volatility Impact Cannot Be Ignored** Furthermore, the report highlights that the market widely expects several ultra-large private tech companies to go public in the coming months, and the associated market volatility should not be overlooked.
The pre-IPO financing valuations of the current top ten global private companies range from hundreds of billions to nearly a trillion dollars, with an average size about twice that of the median NDX constituent. An issuance size of around $50 billion would far exceed the scale of the largest historical IPOs.
Bank of America estimated the potential volatility of newly listed large tech companies using three methods, arriving at a range of 100%-120%:
* **Comparable Company Analysis:** AI companies that IPOed in 2025 showed an average realized volatility of about 96% over six months post-IPO, with an average free float of about 14%. * **Alternative Pricing Channels (Perps, Secondary Markets):** Estimates for three widely speculated large private companies indicated an average volatility of around 108%. * **Public Funds Holding Pre-IPO Stakes:** Volatility data from related funds supports extrapolation to a volatility level of approximately 120%.
This volatility range is about three times the average volatility of NDX constituents. Given that new listings often have low initial free floats (limited tradable supply can amplify volatility), Bank of America considers these estimates conservative.
Regarding the index-level impact, Bank of America estimates the initial effect of large new constituents on NDX index volatility would be positive but modest (+0.1 volatility points). However, this impact could rise to +1.1 volatility points as listing sizes increase or free floats rise. At the single-stock level, the NDX's weighted average constituent volatility could increase by 0.4 volatility points to 3.4 points, and the dispersion of volatilities within the NDX could widen by 0.3 volatility points to 2.3 points.
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