Article from Barrons
This week the Barrons magazine has a good article explaining this new invsting-trading vehicle, the QQQ -- NASDAQ 100.
pcyhuang
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Impressive Debut, by Michael Santoli
In just three days last week, more than $1 billion worth of High-Tech
America changed hands across a little patch of the American Stock
Exchange Floor. The vehicle: Nasdaq 100 Index shares. Their immediate
success is a forceful testament to financial engineering and
investors' unquenchable appetite for any sort of technology play.
The shares represent ownership in a trust that holds all the stocks in
the Nasdaq 100 (NDX), the biggest names on the Nasdaq Stock Market.
Their rollout Wednesday marked the splashiest evidence of synergy
emerging from the merger of the Amex and Nasdaq. The marriage linked
the birthplace of the Spyders S&P 500 index shares with the incubator
of technology wealth machines like Microsoft.
Tech Proxy
Though constructed like Spyders, the Nasdaq 100 shares, listed under
the symbol QQQ, have certain distinct characteristics that should be
kept in mind by potential traders. Where the Spyders are a one-stop
tool for gaining broad exposure to the stock market, the NDX shares
are a remarkably concentrated proxy for the tech sector. Computer and
software stocks together account for about 63% of the index's value.
Add in the 18% taken up by telecommunications issues and the index
becomes almost a pure play on the bits, bytes and bandwith economy.
And the giants of that economy have a lot of clout in the index.
Microsoft alone accounts for more than 15%, twice the weighting of No.
2 Intel, meaning that for every $7 put into the Nasdaq 100 shares more
than a dollar goes to buy Microsoft stock. What's more, as of
Thursday's close, the top five stocks in terms of market value --
Microsoft, Intel, Cisco Systems, MCIWorldCom and Dell Computer -- made
up almost 40% of the NDX.
Nasdaq, of course, is well aware of the tendency of the tech giants to
dominate the NDX. In December, in an attempt to lessen their impact on
the index, Nasdaq rebalanced the components of the
market-capitalization-wighted guage. Microsoft was knocked down from
22.5%, Intel from 12.8% and so on; the top five were cut from over 48%
of the index to around the current 40% (although some individual
weightings have edged up again).
The weightings will be reviewed quarterly and if any one stock gets
too big -- 24% of the whole -- the index will be rebalanced again,
which will mean that the Nasdaq 100 share trust would be forced to
sell some of the huge names and sprinkle the cash among smaller
components.
One additional idiosyncrasy in the new product, compared with Spyders,
involves expenses. The exceptionally efficient trust is slated to
incur fees of 0.18% a year. But even that small amount likely won't be
covered by the dividends of the 100 stocks in the trust, in contrast
to the Spyders, whose dividend yield more than pays for expenses. The
yield on the Nasdaq 100 is now just a sliver, 0.07%, meaning that
slowly, almost invisibly, the net asset value of the NDX shares will
likely slip below the stated value of the index.
Convenience Product
But these wrinkles seemed hardly an issue for investors last week, who
rushed into the new instrument to the tune of nearly 4 million shares
a day, relishing the handy product as an easy alternative to NDX
options and futures traded in Chicago.
It's too early to tell whether the launch of the NDX shares will crimp
trading in options and futures on the index. Because of the NDX's
volatility, these instruments often are viewed as treacherous and
expensive. But so far, the specialists at Susquehanna who are handling
the trading of the NDX shares on the Amex floor have been making a
pretty tight and liquid market: The spread between the bid and offered
prices last week generally ran at 1/8 to 3/16 -- a narrow band worthy
of even the most liquid Nasdaq names. |
