Nasdaq OMX Group elected to conduct a special rebalancing of the popular Nasdaq-100 Index after a rapid rise in some of the benchmark’s stocks, an executive at the exchange said in an interview Tuesday.
Nasdaq said the index rebalance would sharply reduce Apple’s weighting. The stock currently accounts for more than 20% of the index, resulting in concentration at Nasdaq-100-tracking exchange traded funds (ETFs) such as PowerShares QQQ (NasdaqGM: QQQ).
John Jacobs, executive vice president at Nasdaq’s global index group, said the company looked at rebalancing the Nasdaq-100 early last year because the stock weightings had drifted away from actual market capitalization.
However, he said the firm didn’t want to disrupt the re-ranking of Nasdaq-100 stocks, which is announced in December.
“So we wanted to do any change in the first part of the year,” Jacobs explained.
The Nasdaq-100 was initially rebalanced in 1998 so the benchmark would meet diversification rules for investment products such as ETFs.
However, over time and market cycles, the adjustment factors determined in 1998 “in order to reduce the weights of the top index securities, have created a scenario where index weights are no longer in alignment with actual market capitalization weights,” Nasdaq said in a presentation.
The special rebalance will be enacted based on index stocks and shares outstanding at the end of March.
Nasdaq said it has conducted research to determine the historical impact if the Nasdaq-100 had not been adjusted in 1998. The hypothetical market-cap-weighted version regains an “extremely high” correlation of 99.3% to the Nasdaq-100 after the original index rebalance, it says.