The NASDAQ 100 – How We Got Here: MSFT, AAPL

The big news this morning is that the NASDAQ 100 (hereafter: NDX) is finally going to rebalance its index weights to adjust for AAPL’s outsized contribution (AAPL is currently 20% of the NDX).  The NDX is a modified cap-weighted index, which means that the weights of the components are based on the market capitalizations of the underlying stock – but not directly – there are some fudge-factors involved.  Back in 1998, $MSFT had grown to be a mutant 25% of the index (because, remember, if MSFT’s market cap increases at a higher rate than the other stocks in the index, so does its weight, as the index holds shares in proportion to the market cap), so NASDAQ added adjustment factors to “normalize” the weights.  They classified stocks as large stocks (greater than 1% weighting) and small stocks (less than 1% weighting), with 1% being the average weight in an index with 100 stocks.  NASDAQ then scaled the “large stocks” down, and applied those weight decreases proportionally to the “small stocks,” increasing their weights.

Well, back in 1998, $AAPL was one of those small stocks ($QCOM was as well) – and their 1998 weightings were skewed upwards.  Now, as a result of more than a decade of torrid performance, this upward weighting boost has been compounded and magnified to the point where if you sort the NDX by constituent weights, you’ll notice that the weights don’t correspond to the market caps in ordinal rankings or relative rankings.   In other words, AAPL’s weight is many multiples of MSFT’s weight, but it’s market cap is not many multiples of MSFT’s market cap.  Similarly, QCOM’s weight is larger than several companies which have larger market caps!  Let’s talk a quick quantitative look at what I’m talking about, using data from QQQ’s website:

Ticker Weight Market Cap
$AAPL 20.36% $311 B
$QCOM 4.89% $87 B
$GOOG 4.17% $185 B
$MSFT 3.43% $217 B
$ORCL 3.34% $173 B

 

You can see the severe disparity in the relationship between market cap and index weight.

So anyway, NASDAQ is going to adjust the weightings again.  They have a detailed presentation about the history of what I described above, the reweighting process, and the new weights in a PDF they’ve published.  Note, as you can see on page 23 of NASDAQ’s presentation, the new weights will not be perfectly proportioned to the current market caps (ie, AAPL’s new weight will be 12.33% while GOOG’s will be 5.77%, but AAPL’s market cap is not more than twice GOOG’s).

The biggest weight decreases are

$AAPL (20.49 % –> 12.33%),

$QCOM (5.00% –> 3.48%),

$SBUX (1.79% –> 1.08%).

The biggest weight increases are

$MSFT ( 3.41% –> 8.32%),

$ORCL (3.32% –> 6.68%) ,

$INTC (1.74% –> 4.20%)

The changes will happen on the market close on April 29th.

-KD

related reading: Kathleen Pender’s explanation of how the current weight disparities came about.

 

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