Trading in Nasdaq 100 Tracking Shares Surges: Taking Stock
By Robert Dieterich
New York, May 10 (Bloomberg) -- The three-year-old security that mimics the Nasdaq 100 Index passed Cisco Systems Inc. as the most actively traded U.S. equity, appealing to investors seeking to reduce costs and risks when betting on computer-related shares.
The increase in trading of the Nasdaq 100 Tracking Stock, known by its ticker symbol QQQ, contrasts with the plunge in the index - made up of the biggest companies in the Nasdaq Composite Index - and the decline in Nasdaq trading.
``The Q's are a great way to play large-cap tech without taking the risk of owning any one single name,'' said Brian Pears, head of equity trading at Victory Capital Management, which oversees $70 billion in Cleveland.
Average daily volume for the QQQ's climbed to 81 million shares this year, up from 71 million last year. About 14 million traded daily in 1999, the year they were introduced. The Nasdaq 100 has plummeted three-quarters from its March 2000 peak, and trading in Nasdaq shares fell to a daily average of 1.76 billion this year from 1.84 billion last year.
While the QQQ trades like an individual stock, it's a fund created by the Nasdaq Stock Market that holds all of the companies in the Nasdaq 100, from Microsoft Corp. to Sepracor Inc. That shields investors from the blow-ups in a single stock.
Nasdaq 100 component VeriSign Inc., a manager of dot-com Internet addresses, fell 46 percent on April 26 after cutting its sales forecast. The QQQ fell 4.3 percent that day.
Exchange-Traded Funds
The rise of the QQQ reflects the increasing use of exchange- traded funds, or ETFs, which trade like stocks though provide a stake in a number of companies, like mutual funds.
Daily volume of the Semiconductor Holders Trust, another popular ETF, which mimics an index of 20 semiconductor stocks, traded more than 10 million shares in a day for the first time on May 3.
The ETF that mimics the Standard & Poor's 500 Index, known as SPDRs (pronounced spiders), had record volume in the first week of trading following Sept. 11; since then, trading has been 75 percent above the average for the six months prior to the attacks.
``More and more people are switching'' to exchange-traded funds such as the QQQ, said Joel Kraut, an owner of Orbit II Partners, a 35-person trading firm. ``The cost of execution is low, it's quick and easy to trade, and there's less exposure to any individual bomb,'' he said.
Trading the QQQ generally costs investors the same as trading a single stock, and because of the high volume, even large trades can usually be done very close to the best bid or offer.
Managing Risk
The QQQ is often used by portfolio managers to quickly put money to work in technology stocks, when money is flowing into a fund or when the manager makes a bet that technology stocks will rally, Pears said. Managers at Victory do not use the QQQ, however, because their strategies call for buying and holding stocks, Pears said.
A rally in technology stocks helped boost daily volume of the QQQ to 130 million shares on Wednesday, one of the five busiest days in the stock's three-year history, traders said.
So-called ``shorts,'' who sell borrowed shares in a bet they can buy them back later at a lower price, have also boosted QQQ volume, traders said.
Technology stocks rallied in the fourth quarter of last year, giving the Nasdaq 100 a 35 percent advance, and prompted some investors to short the QQQ.
Low transaction costs, diversification and the ease with which the QQQ can be traded are as appealing to short investors as they are to those who buy the QQQ, traders said.
In addition, the QQQ is not subject to rules that prohibit short sales when a stock is falling. ``That's one of the key drivers of the success'' of the QQQ, according to Tom Jardine, head of ETF trading at Deutsche Bank Securities. ``Hedge funds find it extremely useful that they can sell it short on a downtick,'' he said.
Short interest on the QQQ reached a record in December. The Nasdaq 100 Index peaked on December 5 and has fallen 32 percent since then.
Whether the market is rising or falling, use of the QQQ will continue to grow because it's ``convenient and cost-efficient,'' according to said Mike McCarty, head of ETF trading at Morgan Stanley Dean Witter & Co. And the added protection of buying 100 stocks at a time, rather than one, will also hold sway, he said.
``I've had countless people tell me `I'm right on the sector and I'm wrong on the stock,'' McCarty said. The solution he proposes is to buy the QQQ. |
