The Nasdaq-100 Gets a Facelift

It hasn't been done in nearly 13 years, but the Nasdaq OMX (Nasdaq: NDAQ  ) announced yesterday that the Nasdaq-100 is set to undergo a facelift on May 2 that will drastically change how stocks within the index are weighted. The Nasdaq cited large changes in market capitalizations since the last rebalancing as the reason behind the move.

What this means for shareholders of the largest tracking index of the Nasdaq-100, the PowerShares QQQ Trust (Nasdaq: QQQ  ) , is that they can expect plenty of mutual fund and hedge fund jockeying ahead of the rebalancing.

Winners and losers
The biggest winners of the rebalancing appear to be large-cap technology names. Microsoft (Nasdaq: MSFT  ) will actually have the largest weight increase of any company, jumping from its current 3.4% weighting to 8.3%. Oracle (Nasdaq: ORCL  ) and Intel (Nasdaq: INTC  ) will also see their weighting more than double from current levels, while Google (Nasdaq: GOOG  ) will rise from 4.2% to 5.8%.

But for every winner there needs to be a loser -- and this rebalance has plenty of them. In fact, although no companies were removed from the Nasdaq-100, 82 of the 100 companies that comprise the index will see their weighting fall.

None will feel the pinch more than Apple (Nasdaq: AAPL  ) which is slated to see its share of the index fall from its current level of 20.5% to just 12.3%. The company will still represent the largest weighting of the Nasdaq-100, but a reduction from one-fifth to one-eighth of the index reduces the stranglehold that one single company has on the performance of the index.

Impact on investors
What this means for shareholders of any company within the Nasdaq-100 is a potential buying or selling flurry from mutual funds and hedge funds which closely track the index. There is no doubt in my mind that funds will attempt to front-run the rebalancing, but two key things could stand in their way.

First off, the rebalancing is set to occur during the heart of earnings season. With 57 of the Nasdaq-100 set to report before the April 29th closing deadline, fund managers should keep their eyes planted firmly on a company's long-term prospects instead of a minor jump or fall in weighting, or else they might have the rug pulled right out from under them.

Secondly, the rebalancing itself may sound excessive, but it's hardly noticeable for some of these stocks. Estimates place mutual fund and ETF exposure to the Nasdaq-100 at between $30 billion and $50 billion. That may sound like a lot, but for many of these big stocks, their respective shares of that selling pressure will hardly make a dent on their average daily volumes.

This rebalancing is historic, but in the end it doesn't change a lot outside of giving us a better representation of the Nasdaq-100 based on market capitalization. You shouldn't be changing your investing game plan because of it. Keep your eyes on the long term and ignore the mutual fund white noise over the next month.

Do you intend to alter your investment strategy because of this rebalancing? Share your thoughts in the comments section below and consider tracking these stocks as well as your own personalized portfolio of companies with My Watchlist. Add Intel, Oracle, Google, Microsoft, and Apple to My Watchlist.

Intel, Google and Microsoft are Motley Fool Inside Value choices. Apple is a Motley Fool Stock Advisor selection. Google is a Motley Fool Rule Breakers recommendation. Motley Fool Options has recommended diagonal call positions on Intel and Microsoft and a bull call spread on Apple. The Fool has bought calls on Intel, written puts on Apple, and owns shares of Nasdaq OMX Group, Google, Oracle, Intel, Apple, and Microsoft.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never needs rebalancing.


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