There’s nothing like being a raging winner to create a little "Freudenschade" (sorrow at another's success). And so it may be with the special rebalancing of the Nasdaq-100 index.
Apple’s (Nasdaq: AAPL) current weight in the index is more than 20%. Because the index is weighted by a modified market cap method, Apple’s soaring stock has resulted in tremendous influence on index performance.
After the special rebalancing, Apple’s weighting will drop to an estimated 12.3%. Eighty-one of 100 stocks will garner a smaller share of the index. Google (Nasdaq: GOOG), Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT), and Oracle (Nasdaq: ORCL) are slated to be among the biggest winners.
| Nasdaq-100 Index Rebalancing |
Current Weight |
Projected Weight |
|---|---|---|
| Apple |
20.5% |
12.3% |
|
4.2% |
5.8% | |
| Intel |
1.8% |
4.2% |
| Microsoft |
3.4% |
8.3% |
| Oracle |
3.3% |
6.7% |
Source: Wall Street Journal.
Nasdaq licenses its indexes to ETFs and mutual funds. IRS rules require funds be diversified, so it's likely Apple’s growing weight in the Nasdaq-100 index was looking like a threat to Nasdaq’s licensing business.
The special rebalancing takes effect before the open on May 2, giving index managers just under a month to prepare for the change. There are more than 2,900 products based on the index. PowerShares QQQ Trust (Nasdaq: QQQ) is the largest, with more than $24 billion in assets. Apple stock currently accounts for more than $5 billion of that ETF. Just the QQQ alone will need to sell about a third of Apple’s average daily trading volume to meet its mandate to track the Nasdaq-100.
In the words of John Jacobs, an executive VP at Nasdaq, "It's going to be a big trade."
Of course, the big trade cuts both ways. It’s a positive for Google, Intel, Microsoft, and Oracle, among others.
With this megatrading on the horizon, it’s not just the indexers that will be buying and selling. Other traders routinely play the buying and selling pressure around anticipated index changes. That’s likely to pressure Apple’s stock in the time leading up to the rebalancing.
This is the second time Nasdaq has done a “special” rebalancing. The first was driven by Microsoft in 1998, for the same reason. Microsoft has since underperformed the Nasdaq-100. Could the same fate await Apple? With revenue of $76 billion, Apple has already defied the law of large numbers. It gets tougher to do that each quarter.
Foolish takeaway
The Nasdaq-100 rebalancing is likely to pressure Apple shares in the near term. Shareholders who are concerned about Apple’s long-term prospects may want to wait until after the rebalancing to take profits.
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