Stock Market Benchmark Gets Shake-Up
The Nasdaq Stock Market will replace 15 companies in the benchmark Nasdaq 100 index, dropping mostly technology-related stocks whose values have dwindled in favor of retailers, health-care businesses and a movie studio.
Applied Micro Circuits Corp., Conexant Corp. and Vitesse Semiconductor Corp., all based in Southern California, are among the computer chip makers to be booted from the index, which tracks the biggest non-financial Nasdaq issues.
Companies to be added include Ross Stores Inc., a Newark, Calif.-based discount retailer; First Health Group Corp., an Illinois-based provider of health benefits to large U.S. companies; and Pixar Inc., the Emeryville, Calif.-based animation studio that made “Monsters, Inc.”
About $30 billion is invested in funds tied to the Nasdaq 100, mostly through an exchange-traded fund known as the Triple-Q for its stock symbol, QQQ.
Nasdaq has typically reshuffled the index’s membership at the end of each year, generally replacing stocks that no longer rank among the 100 largest Nasdaq issues by market value (stock price multiplied by number of shares outstanding).
With the collapse of the technology sector since 2000, fewer tech companies make the index’s cutoff.
“It’s a real reflection of what’s going on in the market,” said Mike Byrum, a money manager with Rydex Global Advisors, which oversees $6 billion. “Tech has been diminishing and there have been some other various industries creeping into the index.”
Eight of the companies to be dropped this year are chip-related.
“We’ve seen a decrease in tech and an increase in industrial and retail companies,” said John Jacobs, chief executive of Nasdaq Financial Products.
As the index is currently configured, technology and telecommunications shares account for 76% of its value, down from 89% in March 2000, when the tech sector peaked.
The reshuffling will lower computer-related stocks’ weight in the index by about 3.5 percentage points, based on an earlier estimate by Nicholas Gulden, an analyst at Salomon Smith Barney Inc.
“Over the years, it’s become less of a proxy” for technology stocks, Gulden said.
The changes will take effect at the opening of trading Dec. 23.
Shares that are added to the index can get a lift, at least temporarily, as they are purchased by the index funds that track them. Likewise, deleted stocks may face downward pressure as index funds sell them.
The overhaul matches the biggest previous shake-up in the 17-year-old index. In 1999, there also were 15 changes, as Internet stocks were rocketing in popularity and market value.
Trading in the Triple-Q has averaged more than 90 million shares a day this year, exceeding the 79.5-million average for shares of San Jose-based Cisco Systems Inc., the most active stock of a single company.
The QQQs are “the instrument of choice for most institutional investors seeking short-term technology exposure,” Gulden said.
But the reduction in technology shares’ weighting in the index has prompted some investors to stop trading the QQQs.
“Three years ago, we traded the Qs and used them for hedging purposes” as a proxy for computer-related stocks, said Dodge Dorland, chief investment officer at Landor Investment Management. Now, “we use it more as an indicator to identify the direction of tech momentum.”
Redmond, Wash.-based Microsoft Corp.; Santa Clara, Calif.-based Intel Corp.; and San Diego-based Qualcomm Inc. are the Nasdaq 100’s three biggest members, accounting for 23.2% of the index.
Under new rules adopted in October, Nasdaq plans to change the index’s lineup more frequently. Starting in 2003, index members may be removed throughout the year if their market value is less than 0.1% of the index at the end of two consecutive months.
Besides San Diego-based Applied Micro Circuits, Newport Beach-based Conexant and Camarillo-based Vitesse, the other stocks to be removed from the index are:
Abgenix Inc.; Andrx Group; Atmel Corp.; Charter Communications Inc.; Cytyc Corp.; Integrated Device Technology Inc.; ImClone Systems Inc.; I2 Technologies Inc.; PMC-Sierra Inc.; Protein Design Labs Inc.; Rational Software Corp.; and Sepracor Inc.
In addition to Ross, First Health and Pixar, the stocks that will be added are:
American Power Conversion Corp.; Dentsply International Inc.; Expeditors International of Washington Inc.; Fastenal Co.; Gentex Corp.; Lamar Advertising Co.; Patterson-UTI Energy Inc.; Petsmart Inc.; C.H. Robinson Worldwide Inc.; Ryanair Holdings; Henry Shein Inc.; and Whole Foods Market Inc.
