Briefly Noted
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.
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- From the Bookshelf
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This change was made specifically to adjust for the appreciation in shares of Apple (AAPL). 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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