The NASDAQ’S Rebalancing Act
Last month, NASDAQ OMX announced a rebalancing of its NASDAQ-100 index. Effective May 2, 2011, the index will be reorganized so that each company’s weighting within the index will be more reflective of its relative market capitalization.
In this article
- The NASDAQ’S Rebalancing Act
- The SEC Proposes New Trading Rules
- Retiree Medical Costs to Total $230,000
- From the Bookshelf
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This change was made specifically to adjust for the appreciation in shares of Apple. When the reorganization was announced, Apple had a weighting in excess of 20%, even though the company’s market capitalization suggested a weighting of closer to 12%. The reason for the difference is that NASDAQ had used adjustment factors set in 1998 to weight the index, instead of a company’s actual number of shares outstanding. Effective with the rebalance, the index securities will be closely linked to a company’s actual market capitalization.
The change may have unintended tax consequences for those of you holding mutual funds in taxable accounts. Capital gains will be generated if the NASDAQ’s rebalancing prompts a fund manager to sell shares of Apple at a profit. Particularly impacted are funds that directly or indirectly track the NASDAQ’s weighting. (Exchange-traded funds, or ETFs, do not have this potential tax issue.)
Though the NASDAQ OMX uses a capitalization-weighted strategy for its index, it is not the only strategy. Indexes can also follow equal-weighting and fundamental-weighting strategies. The Dow Jones industrial average uses a unique methodology of weighting each of its 30 stocks by share price, with the calculation adjusted to account for stock splits.
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