An index is traditionally viewed as a barometer of the market or a sub-sector of the market. That is one reason why exchange traded funds are appealing- they give investors broad diversification through one stock. But what happens when one company in the index grows so large it nearly dominates the index and its tracking exchange traded funds (ETFs)?
That is exactly what is happening with the Nasdaq-100 and PowerShares QQQ Trust (NASDAQ: QQQQ), reports Kim Peterson of MSN Money. Apple’s (NASDAQ: AAPL) market share has grown so large, it now accounts for more than 20% of the Nasdaq-100 (QQQQ tracks the Nasdaq-100).
Specifically, Apple’s weight is equal to the combined weights of Google (NASDAQ: GOOG), Qualcomm (NASDAQ: QCOM), Oracle (NASDAQ: ORCL), Cisco Systems (NASDAQ: CSCO) and Intel (NASDAQ: INTC)!
How did Apple get to be so dominant? In addition to the fact that Apple is now the tech sector darling, Microsoft (NASDAQ: MSFT) had a hand in today’s lopsided index. Back when the index was created, Microsoft was such a huge company relative to other tech companies, that the index arbitrarily lowered Microsoft’s weighting.
So even though Apple currently has a market cap of $247 billion compared to Microsoft’s $222 billion, Microsoft only accounts for 4.5% of the Nasdaq-100 index. [Tech ETFs: Can the New iPhone Save Them?]
Fortunately, NASDAQ does have a rule to prevent Apple from getting even larger. Once a stock reaches a 24% weighting, the index can be rebalanced with the weight redistributed down to the smaller stocks.
It’s also fortunate that Apple is riding high these days with the launch of the iPad and a hot new version of the iPhone that has people standing in lines all over the world in hopes of nabbing one before their neighbors.
But for now, you’ll have to accept that the fortunes of QQQQ are heavily tied to Apple’s. [A Few Other Tech ETFs.]
Sumin Kim contributed to this article.