Market indexes aren't carved in stone. They're updated to reflect changing market conditions, some more often than others.
This week saw a heavy reshuffling of the Nasdaq-100 list, which aims to track the largest non-financial stocks traded on the Nasdaq exchange. It's an annual overhaul that takes place at the quadruple witching hour in every December, meaning that the changes take effect as option contracts expire this Friday.
I said it was a big change: The governing board removed and replaced 10 of the 100 constituent stocks -- a 10% turnover. By contrast, the index replaced only five stocks last year as well as seven each in 2010 and 2009..
So who's in and who's out? Glad you asked.
The 10 new additions this year include hard drive builder Western Digital (NASDAQ:WDC), biotech veteran Regeneron Pharmaceuticals (NASDAQ:REGN), and data center operator Equinix (NASDAQ:EQIX). Nine of these 10 additions have outperformed the current Nasdaq-100 roster in 2012:
The list of subtractions is a veritable who's who of 2012 controversy. Here, you'll find Keurig K-Cup vendor Green Mountain Coffee Roasters (NASDAQ:GMCR.DL) rubbing shoulders with digital video guru Netflix (NASDAQ:NFLX) and fallen smartphone favorite Research In Motion (NYSE:BB). Each of these stocks carries a cloud of uncertainty around, like a personal thunderhead of market volatility. Again, nine of the 10 names moved in the same direction -- but they fell behind the Nasdaq-100 index this time:
Falling out of this exclusive club is by no means a death sentence, nor does every new addition automatically thrive. But major index lists are a great starting point for further research, and veritable hordes of investment vehicles are directly based on every market index. The popular PowerShares QQQ Trust (NASDAQ:QQQ) is a direct reflection of the Nasdaq-100 list, for example.