Nasdaq 100 Expected to Cast Off Some Tech

The Nasdaq 100, the index tracked by the popular “QQQ” securities and sometimes thought of as a proxy for the stock market’s technology sector, is about to become less focused on tech.

When the Nasdaq 100’s annual rebalancing is announced today and implemented Dec. 24, several tech and telecom companies are likely to be missing as the benchmark index gets a make-over that reflects the shift in the stock market’s balance of power during the last year.

Biotech firms, however, are expected to get a heavier weighting, continuing an upward trend of recent years.

The volatile index, roughly defined as the 100 biggest nonfinancial companies trading on Nasdaq based on market capitalization, gained prominence as it soared 85% in 1998 and 102% in 1999. But it has dropped about 31% this year after losing 37% in 2000.

The Nasdaq 100’s reputation as a tech proxy is likely to become increasingly tenuous, analysts say, as its combined tech and telecom weighting drops to roughly 67% after the rebalancing from 70% now. At the end of 1999, near the height of the bull market, that weighting stood at 87%.

“The technology weighting will go down, but it’s still going to be significant,” said Murali Ramaswami, head of quantitative research at Lehman Bros. He expects about 12 companies to be replaced.

Hard-hit tech and telecom stocks that might get dumped, Ramaswami said, include Internet incubator CMGI Inc., off 65% year-to-date; 3Com Corp., down 43%; and Metromedia Fiber Network Inc., off 95%. Possible additions include biotech names such as Cephalon Inc., up 10% this year, and Icos Corp., up 19% year-to-date.Stocks added to major indexes such as the Nasdaq 100 often get an immediate boost, while stocks deleted often take a hit, because mutual funds that track the benchmarks must buy or sell the shares.

The changes in the Nasdaq 100 reflect the increasing importance of health care and biotech in the economy, Ramaswami said. The biotech-health-care weighting could rise to 15.2% from 13.5%, he estimated.

“The index was never meant to be pure tech,” said John Jacobs, senior vice president of the Nasdaq Stock Market. “It reflects the growth segment of the economy, whatever that may be.”

Despite the index’s slide in value since the tech bubble burst in spring 2000, the exchange-traded fund--or ETF--based on the index and known by its ticker symbol QQQ still has $22 billion in assets and trails only the shares of Cisco Systems Inc. in average daily trading volume.

“It’s an easy vehicle for people to trade, and it’s easy to understand,” said Matt Johnson, a trading director at Lehman Bros.

ETFs are stock-mutual-fund hybrids that comprise the components of an index but trade throughout the day like a regular stock. Traditional mutual funds usually are traded and priced just once a day. One effect of the Nasdaq 100’s rebalancing may be to temper the index’s volatility in 2002, Ramaswami said.

Also, the Standard & Poor’s technology-sector ETF that trades under the ticker symbol XLK may draw assets from the QQQ, he said. The XLK fund has only about $1.3 billion in assets, Ramaswami said, but since September its trading volume has been rising.