Tom, thought this article from "The Raging Bull" interesting. Got any thoughts on it.
C A P I T A L I S T P I G
Q'ing Up: Getting Ready to Party with the Nasdaq 100 Index Trust
February 8, 1999 - 10:13 PM
By Jonathan Hoenig
Kvetching over the seemingly endless winter, a quick call to my friend Dan Noonan at the American Stock Exchange has made me giddy like a stock-obsessed schoolgirl. Dan, one of the mad scientists who spends his days dreaming up wacky but wonderful investment products, has whet my appetite for Q, which should be arriving later this Spring barring any last minute mishigas from the SEC.
Q, in this case, has nothing to do with the British bloke from the James Bond movies. It's the ticker symbol under which the new NASDAQ 100 unit trust will trade on the American Stock Exchange. With the exception of the highly leveraged NASDAQ 100 futures offered at the Chicago Mercantile Exchange and the CBOE's NASDAQ 100 options, "Q" will be the first NASDAQ-licensed product directly marketed towards individual investors. I happen to think it was also be the most popular.
The launch follows a successful precedent: The Spider (SPY), or S&P 500 unit trust, has proven to be a killer app for the "Curb Exchange", where it often ends up as the volume leader, trading upwards of six million shares a day. The Mid-Cap Spider (MDY), which follows the S&P 400 index of mid-cap stocks, has been met with slightly less enthusiasm, reflecting the lackluster interest that has haunted smaller stocks throughout the 1990s.
Basically, Q will act like an open-ended mutual fund that will track the NASDAQ 100 stock index, a benchmark of large-cap tech stocks. While more traditional open-ended funds are also in the works, Q will uniquely allow you buy and sell shares continuously throughout the trading day. Like its Spider-sisters, one can expect Q to closely follow the intra-day movements of its target index. Institutional arbitrage will keep the prices in line.
The launch also comes in the wake of wicked investor enthusiasm about indexing. In terms of size, Vanguard's S&P 500 index fund is nipping at Magellan's butt. It should overtake Fidelity's flagship sometime within the next 12-18 months. Besides, even a cursory glance through the Wall Street Journal's "C" section gives one an idea of how far indexing has come.
Let's say you wanted to take a long position in the domestic stock market: You could buy calls on any number of broad-based indexes (SPX, OEX, DJX, VLE, XII, XMI, MID, NYA). You could go long a dizzying array of futures contracts (S&P, E-mini, Dow, Value-Line, Mini-VL, NYFE). You could buy index mutual funds (Vanguard has 'em in the dozens). Or you could buy the index trusts (SPY, MDY and now Q). When it comes to indexing, Wall Street looks strangely like the Price Club.
There's something for everyone.
What's not to like? The best trade of our lifetime would have been to go long the S&P after the '87 crash, light a cigarette and go out for pizza.
For the next 13 years.
Stats support the facts on indexing: Leah Modigliani, a strategist at Morgan Stanley, ranked 660 mutual funds over a ten-year period. She looked at all types of stock funds, from growth to value and from biotech to big cap. What she found was that the funds, whose returns were in the top 25 percent in the first five years, had only a 28 percent chance of being in the top 25 in the next five years.
In fact, top-performing funds had only about a fifty- percent chance of being in the top half of the funds in those next five years. Wall Street Journal columnist Robert McGough summed it up quite well when he wrote that "In essence, it was a toss of a coin whether a top performing fund at the end of 1992 was also a top performing fund at the end of 1997"
Indeed, low expenses, tax efficiency and consistent performance has created legions of index-devotees Tony Robbins couldn't touch. And while I find most of efficient market hypothesis hard to swallow, the long-term benefits of indexing are almost impossible to ignore.
According to Ibbotson and Associates, an overwhelming majority (over 98%) of a portfolio's performance is a direct result of asset allocation. Shocking as it may seem, an ability to time the market, or even pick strong stocks has much less of a beneficial impact as solid asset allocation: deciding what percentage of a portfolio should be allocated to stocks, bonds, cash or other major asset classes.
Index products like Q allow an individual investor to fine-tune a portfolio's asset allocation down to the dime. With the NASDAQ 100 trust, Spiders, and the drawing-board-stages Russell 2000 small cap index trust, investors are free to paint their portfolios like a monetary Mattise. Want 5% more exposure to tech stocks? Want to stick to a 70/30 (stocks/bonds) split? With index products, asset allocation becomes easier then picking up a dime bag in Washington Square Park. Not that I would know, of course.
Once initial liquidity has been established, more sophisticated traders might want to explore some arbitrage opportunities themselves, including hedging a long position in Q against a short position in one of the index's large-cap tech names. Another play I'm backtesting is a short Q/long MDY spread, a play which basically anticipates the now-stratified market to broaden out in the coming weeks.
Oh didn't I mention that you can short Q? Yes indeed, perhaps the most exciting part of the index trust product is that it can be easily shorted -- even on a downtick. With valuations in the nosebleed section and the index still up some 75% over the last 12 months, it just might be the contrarian play to make this year.
Want more info? The offering is still in the SEC "quiet period", but the basics are available at
www.amex-nasdaq.com.
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