What the Nasdaq 100 rebalance means

Marketplace Staff Apr 5, 2011
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What the Nasdaq 100 rebalance means

Marketplace Staff Apr 5, 2011
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Bob Moon: If you own shares of Apple, Microsoft or Starbucks, or if you have a “growth fund” in your 401(k), you might be interested in something that the Nasdaq did in the dead of night. It said it will make several changes in something called the Nasdaq-100 Index, and the market was abuzz today. Our New York bureau chief Heidi Moore is here to tell us about that.

Heidi Moore: Hi Bob.

Moon: First off, I think it would be helpful for us to be clear on just what is the Nasdaq-100 Index.

Moore: Sure. It’s one of the gauges of how Nasdsaq stocks are doing. It’s not the Nasdaq Composite, which everyone hears about and which we talk about every day in The Numbers roundup. The composite index includes every single stock on the Nasdaq. The Nasdaq 100 is a basket of the most important non-financial stocks — the Apples and Microsofts and Oracles and Intels, the heavyweights.

Moon: OK. So then what are they doing to the Nasdaq 100 that made Wall Street sit up and take notice today?

Moore: Well the Nasdaq 100 tries to balance this basket of important stocks based on the size of the companies. So Apple’s stock has quadrupled in value over the past 2 years, so it was about to tip the basket over. It was like a giant ostrich egg in a basket of chicken eggs. Here’s how Josh Brown, a financial adviser, described it.

Josh Brown: You had this stallion of a stock, Apple, making up 20 percent of the index all this time. And Apple has really done nothing, but go up. The price has grown to the point where it was almost completely dominating the day-to-day moves in the Nasdaq.

So the Nasdaq had to perform what Brown calls “reverse Darwinism.” You can call it “punishment of the fittest.” So now Nasdaq wants to rebalance that basket. They’ll reduce the shares of 82 stocks — including Apple, Starbucks and Qualcomm. But that means that some stocks will get a bigger share of the basket, like Microsoft and Oracle.

Moon: So they’re changing the way they measure these stocks, but changing the mercury really shouldn’t change the numbers. Does this actually change the fundamentals at these companies?

Moore: Not really. It may change the value of your 401(k), but Apple or Microsoft aren’t better or worse companies than they were yesterday. Their stock prices are going to change anyway. A lot of mutual fund managers track the Nasdaq 100. In fact, about $330 billion of mutual funds base their investments on this index. So then they have to buy stocks like Microsoft, Oracle and Intel and sell stocks like Starbucks or Qualcomm to keep up with the changes, and that’s going to affect the stock prices. But all of that will officially happen on May 2nd, so we have some time.

Moon: Stay tuned. Our New York Bureau Chief Heidi Moore keeping us up on the changing game on Wall Street. Thanks.

Moore: Thank you, Bob.

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