Nasdaq 100 Rebalancing: What to Expect

Bob Pisani is off; this post was written by CNBC producer Robert Hum.

One of Tuesday's big stories is the Nasdaq’s announcement to conduct a special rebalancing of the Nasdaq 100 index, which tracks the largest 100 non-financial firms listed on the Nasdaq. The rebalance will be effective prior to the open on May 2. This action will make the index more representative of the components’ current market caps, but for investors, it could also likely cause some price volatility in the Nasdaq 100’s underlying stocks and greater trading activity in the index’s related ETF over the next month.

The last special rebalancing occurred back in December 1998, but that was done mainly to reduce the impact of Microsoft, which was a gigantic stock at the time, making up more than 25% of the index. Since no individual stock can make up more than 24% of an ETF, before the PowerShares QQQ Trust ETF (QQQ) launched in March 1999, a reduction to Microsoft’s weighting had to be made back then.

That adjustment eventually caused some disproportionate weightings in some of the Nasdaq 100 stocks. For example, even though Apple has a 44% bigger market cap than Microsoft , Apple currently has a 20% weighting in the index — far exceeding Microsoft’s 3.7% index weighting. But following the forthcoming rebalancing, Apple’s weighting will be slashed to 12%, marking the most significant change in the index. Meanwhile, other big cap tech stocks like Microsoft, Google, Cisco Systems and Intel will see a modest boost to their weightings. All in all, 82 stocks will see their weightings reduced, with the extra weight redistributed amongst the remaining 18 securities.

Now what about Apple and the Nasdaq 100?

The Nasdaq 100 has thrived in recent months thanks to Apple’s strong outperformance. Apple made up a whopping 42% of all the index’s gains last year. That certainly helped the Nasdaq 100 outperform the S&P 500 in 2010 too (up 19% vs. the S&P’s gain of under 13%). Going ahead, traders wonder if the new weightings might temper the index’s futures gains as other big tech stocks like Microsoft and Cisco (which will have greater weightings in the index) have gone nowhere over the past 10-12 years.

So what effect might this rebalance have on trading of Apple? Expected some selling as indexers have to significantly reduce their exposure to Apple. According to Dave Nadig at, about $300 billion in funds are indexed to the Nasdaq 100. As a result, $60 billion in Apple (or about 19% of its market cap) is tied to the index. That’s a significant amount of money coming out of Apple, so shares of the Cupertino-based company could see some near-term pressure in the coming weeks.

As for the QQQ ETF, higher-than-expected trading volumes are expected especially as it is one of the most widely-held ETFs in the market with over $24 billion in assets. The QQQ is also consistently one of the most actively-traded ETFs. According to the National Stock Exchange, in March, the QQQ traded 1.4 billion shares, fourth highest of all ETFs. Only the SPDR S&P 500 (SPY), SPDR Financial (XLF), and iShares MSCI Emerging Markets (EEM) ETFs saw greater volumes.

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