Here's some more on the QQQ rebalancing from Barrons/WSJ online:
New Shape to QQQ-bism
Index revamp to affect stocks, options
By Erin E. Arvedlund
The Nasdaq 100 index emerged as Wall Street's way of riding the technology roller coaster. In 1999 alone, the tech-laden index doubled from 2000 to 4000, and then collapsed following the dot.com debacle.
As a proxy for tech, the Nasdaq 100 unit trust, or QQQ, became one of the most successful exchange-traded funds, and currently trades an average of about $2.5 billion a day.
But after this year's changes to the Nasdaq 100, the index will likely diversify away from technology and be less volatile. And that has implications for option investors.
The rebalancing of the underlying Nasdaq 100 index in December is bound to have a significant impact on the markets. Last year, stock added to the Nasdaq 100 outperformed the underlying index by 10% in the three days before the reconstitution date, and underperformed by 11% in the subsequent 10 days, according to a recent report by Bear Stearns strategist Wing Chow.
The timeline of the rebalancing works this way: on Wednesday, Nasdaq will peg the prices of replacements and deletions. Nasdaq won't announce final changes until the morning of December 17, and those changes are effective after the close of trading on the third Friday in December, or the December 21 market close.
Lehman Brothers recently projected the Nasdaq 100 index's most significant industry-weighting increase would be in drugs, up to 15.8% from 12.9%, making it potentially the third-largest industry in the index. Computer software, estimated at 23.1%, has the biggest weight, followed by semiconductors, which could show the biggest decline to an estimated 16.3% from 18.5%, says Lehman managing director of equity derivatives Murali Ramaswami.
What does this mean for option traders? With less tech in the Nasdaq 100, the QQQ and its options should be less volatile. "There should be a lot of health-care names going in and tech names coming out," adds Chow. The volatility of the Nasdaq 100 versus the broad indexes like the Standard & Poor's 500 should narrow, while the volatility of Nasdaq 100 versus sector indexes such as the Morgan Stanley high-tech index (MSH) and Philadelphia Semiconductor Index (SOX) should widen.
Also, new technology benchmarks could eventually rival the QQQs dominance as the leading technology ETF, such as the Technology SPDR (XLK), Technology iShares (IYW) or the Semiconductor HOLDRs (SMH).
IJ on the Yahoo SEPR club calculated that this would mean the trust purchasing some 1.8 million shares of SEPR if it is in fact added.
Peter |
