Index Rebalance to Impact PowerShares QQQ, Apple

 NASDAQ OMX (NDAQ) announced that it will rebalance its Nasdaq-100 Index, which will have a significant impact on the holdings of the tech-heavy exchange-traded fund  PowerShares QQQ (QQQ), which is one of the most traded securities on the planet.

The rebalancing of the benchmark, which will occur at the close of trading April 29, is driven by the continued overweight in the index of  Apple (AAPL), which far and away is QQQ's largest holding, at almost 21% of assets. A modified market-cap-weighted index, the Nasdaq-100 Index was created in 1985. By 1998,  Microsoft (MSFT) had become such a large part of the index that the Nasdaq made the decision to forcibly lower Microsoft's weighting. Since that time, of course, Apple has grown rapidly (up more than 300% in the past two years), and now its market cap dwarfs that of Microsoft.

Now, the rebalancing that has been announced means that Apple's share of the index--and by extension, its weight in QQQ--will fall to a still-meaningful 12%. Other index constituents will be impacted as well. In total, the weightings of 82 stocks in the index will fall, while the remaining 18 will see their positions increased. Chief among those are  Google (GOOG), whose weight will rise to almost 6% from 4%, and Microsoft, whose weight will increase to 8% from 3%.

NASDAQ OMX "decided to enact a Special Rebalance in order to bring the weights of the Index Securities closer in line with their actual market capitalizations," NASDAQ OMX said in a statement.

The rebalancing will likely have a negative impact on shares of Apple, which should come under pressure as the managers of QQQ and other products tied to the Nasdaq-100 begin working to modify their holdings accordingly. However, the value of shares being sold in QQQ is relatively small compared with the overall market valuation of Apple.

For investors in QQQ, also known as the "Cubes," the "Qubes," or the "Qs," the rebalancing should raise the immediate question of whether it will create a taxable event. A PowerShares spokesman told Morningstar that QQQ's trustee, the  Bank of New York Mellon (BK), has not yet determined whether it will trigger a taxable event. However, it's clear to us that the selling of AAPL will generate taxable gains. At the same time, we expect those gains to be offset to a large degree by some realized losses from the tech-bubble collapse. We will not be certain how much will be offset until the rebalance is completed.

 

 

		ETFInvestor Newsletter
	Let our new newsletter, Morningstar ETFInvestor, help you navigate the exciting and new world of exchange-traded funds. Each issue includes recommendations for commonsense ETF investing,		ETF spotlights, and critical data on 150 top ETFs. This one-year subscription consists of 12 monthly issues. Learn more.
	$185.00 for 12 Print Issues		$175 for 12 PDF Issues

Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including BlackRock Asset Management, First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.