QQQ rebalance coming 17 Dec.>
Times Are Changing for the QQQ
by Ben Warwick
Come December, the Nasdaq 100 index is scheduled for a makeover.
On the morning of Dec. 17, Nasdaq will unveil its list of deletions and replacements to the index, which will become effective as of the close of trading on Dec. 21. The rebalanced index will most likely see a lot less tech issues.
The cap-weighted Nasdaq 100 is currently rich with technology stocks. Computer software, at about 23%, comprises the greatest weighting of the index. Semiconductors make up the second-largest sector at about 16%.
It's highly likely that December's rebalancing will result in much smaller industry-weightings in various technology sectors. As a result, the index is prone to exhibit less volatility, which initially sounds attractive. However, those who understand the shape of the risk-return curve know that new this means there's less potential upside for the index.
Time for Tech Again?
For many who've ridden some part of the index's undulating ride -- a la the Nasdaq 100 unit trust (QQQ) -- now seems to be a potentially opportune time to start recouping losses, as many foresee an impending comeback for tech stocks.
And as the QQQ has been the most prevalent vehicle for doing so in a diversified, tax-efficient, and cost-efficient manner, some may find the diminished technology allocation frustrating.
There are, however, other ETFs that will continue to provide the adrenaline-laden volatility levels that the QQQ has offered for years. The Technology Select Sector SPDR (XLK) and the iShares Dow Jones Technology Sector Index Fund (IYW) should gain a lot of ground on the QQQ, which currently trades an average of $2.5 billion per day, in pursuit of venerability amongst technology ETFs.
Arbitrary Investments
As the Nasdaq 100 morphs into an index whose volatility resembles something more along the lines of the S&P 500, there are sure to be some short-term arbitrage opportunities.
Last year, the new additions to the Nasdaq 100 out performed the aggregate index by about 10% during the three days prior to the reconstitution date. Conversely, those issues being dropped from the index underperformed it substantially in the same three days. The S&P 500 index components have exemplified similar behavior with such consistency in past years that the phenomenon has been tagged as the "S&P Effect."
Wouldn't it be nice to know what issues will be dumped and which will be added? While Nasdaq keeps that information under lock and key until the 17th, investors will no doubt place their bets on which companies will comprise the lists of has-beens and newcomers.
Lehman Brothers recently predicted that the Nasdaq 100's most significant industry-weighting index would be in drugs (a bump from 12.9% to 15.8%). But they weren't as foretelling when it came to the individual issues that might be added.
It still seems a bit premature to jump all the way in with the technology bulls. But as indexes such as the Nasdaq 100 shake things up, it's advantageous to have the right hunch about what's coming and going. |
