Nasdaq-100 Index Stock-ing Stuffer

(December 18, 2002)This edition of the market update will focus on more of an educational update. Many investors talk about the “indexes”, but few know exactly how they are comprised. Given an imminent rebalancing of one of the more popular indexes, the Nasdaq-100, we felt it was a good time to review the basics of the index.

Each December, the Nasdaq resets its Nasdaq-100 Index. The index is meant to represent the largest 100 non-financial stocks in the Nasdaq Stock Market and has become a proxy for large-cap technology stocks. So each year, stocks that have fallen in capitalization (size) must be replaced by larger companies.

This year, with the continued poor performance of the technology sector, 15 stocks will have to be replaced. Each of these stocks, with the exception of a cable operator, comes from either the information technology or healthcare sectors. Each stock has seen its market capitalization fall below $2 billion. The stocks being added are a more diversified representation of the economy than those that they are replacing. The new companies include a supermarket, an advertising agency, a retail store, an oil driller, an industrial supply company and an airline.

Despite these additions, the index will remain a reasonable proxy for large-cap technology stocks. This sector will see its position in the index only fall from 64% to 58%. The next biggest sector is telecom at 13%, which will overtake biotechnology, which will lose two names as the index resets and saw a number of its holdings shrink in size due to poor returns.

There is approximately $30 billion linked to the Nasdaq-100, with a majority held by indexers in the Nasdaq-100 Index Tracking Stock under the ticker symbol QQQ. There should be a lot of movement in these shares as the indexes reset their portfolios to accommodate the additions and subtractions. The index officially changes on December 23rd. Just remember, that even though the name of the index does not change, the composition of the index does.