Apple's Weighting in Nasdaq-100 Cut

[MacRumors]

Apple's weighting in the Nasdaq-100 Index will be cut on May 2nd to reduce Apple's influence on the stock index.

Apple’s representation will be reduced to 12.33 percent of the index on May 2, from 20.49 percent, Nasdaq OMX Group Inc. said in a slide show on its website today, after previous rules caused its proportion in the gauge to grow disproportionately. The weightings of Microsoft Corp. and Cisco Systems Inc. will more than double.

Apple's weighting in the stock index is said to be overrepresented at 6x the value of the second largest stock (Microsoft) despite only having a 46 percent larger market value.

The Nasdaq-100 consists of the 100 largest nonfinancial stocks that trade on the Nasdaq. According to Wall Street Journal, over $330 billion worth of assets track the index via exchange-traded funds, mutual funds, options and futures. The move could hurt Apple's stock price due to significant selling pressure as indexes adjust to the new weightings:

The rebalancing is likely to kick off waves of trading in the stock market as money managers scramble to adjust holdings to reflect the new composition of the index. There are more than 2,900 financial products tracking the Nasdaq-100 in 27 countries, Nasdaq says. That includes the $24.4 billion PowerShares QQQ exchange-traded fund, which over the past year has been the sixth most actively traded stock on U.S. exchanges.

The changes go into effect on May 2nd.

Article Link: Apple's Weighting in Nasdaq-100 Cut

 

[mistertomlinson]

Go figure... I just started playing in a stock market simulator a few days ago and sunk 50% of my money in Apple stocks...

 

[talkingfuture]

I assume this is goof for the Nasdaq in the long run, they must be worried about being to closely linked to Apple's fortunes rather than representing the range of companies on there.

 

[BlindGoldfish]

So what does this mean for those of us who hold AAPL?

 

[Izlib]

Means I sold it. AAPL has been hyper inflated for a while in my opinion and this move will likely drop it.

Besides, I kind of need the money now.

Then again, with AAPL's illogical gains, it's just as likely to go up... Stocks are just a big legal gambling system anyway. I still need the money.

 

[Stuart21]

Well it's down about 5 points in premarket trading. Sometime it will hold steady there or it might tumble down a little bit further. The stock has not been doing so hot the last 2 weeks or so. I'm thinking about selling and looking for another stock to invest in. My luck as soon as I sell it will hop back up to where it was 2 months ago.

 

[NightFox]

So what does this mean for those of us who hold AAPL?

Nothing at all* - NASDAQ is an 'index' which is just a collection of lots of companies which - in theory - gives it a value that reflects the overall value of these companies, e.g. if the value of some of the companies in the index go down whilst others go up, the actual value of the index might remain the same.

However, sometimes the value of one 'component' of the index (in this example Apple) gets so big that it forms too much of a proportion of the index and as a result anything that happens to that one company has too much impact on the value of the index.

Imagine if a tech index consists of Apple, MS and Dell. When the index is set up, each company accounts for about a third of the value of the index. However, in time the value of Apple grows and the value of MS and Dell shrinks, so Apple now accounts for 80% of the value of the index; MS and Dell only 10% each. This would mean that whatever happened to the value of Apple (i.e. APPL share price) would have too much impact on the value of the index. To avoid this, the index would be restructured to ensure each company made up about 1/3 of the index again.

Indexes aren't really shares. In simple terms, it's just a package sold to you that is based on the value of the shares in the companies that make up that index. It's a way of spreading your risk over several different companies without having to buy and manage the shares in each individual company. Grouping all the companies in a particular market sector (such as tech companies) together to form an index also gives an indication of how that sector is performing overall, without having to analyse all the different companies that make up that sector.

*The reality is a bit more detailed than that, but hopefully that explains that nothing is actually happening directly to APPL stock price.

 

[orbital]

Means I sold it. AAPL has been hyper inflated for a while in my opinion and this move will likely drop it.

Besides, I kind of need the money now.

Then again, with AAPL's illogical gains, it's just as likely to go up... Stocks are just a big legal gambling system anyway. I still need the money.

This change over will have no influence on AAPL. The action is a positive for Apple, this is not a cut only changing how much influence it has over this key non financial indicator. Its not to say that I would buy right now but Apple has been on the move and its price may be a little over inflated. My biggest issues with trading it are the high by-in, lack of dividend and that it hasn't split in 20 years.

 

[jbutterfill]

what happens to the share price

Index re-weightings occur often and the index methodology is well known, hence most in the market would have anticipated this.

Assuming the $330bn of assests track the Nasdaq 100 this would knock $26bn off the market value. Prior to the anouncement AAPL fell 3.2% - or $10bn, this move was most likely due to the index re-weighting. It is likely that we will therefore see another $16bn drop pushing the share price to around the $323 mark.

That said, many passive index tracking funds can only adjust their portfolios on the day of the index re-weighting, it is tricky to find out which funds can do this on the day and which cant do it - so absolute worst case (ulikely) would be the price falling to $311

Either if its $323 or $311 it a good opportnity to buy, or add mre into the stock if you already own to make up for this loss.

 

[jbutterfill]

This change over will have no influence on AAPL. The action is a positive for Apple, this is not a cut only changing how much influence it has over this key non financial indicator. Its not to say that I would buy right now but Apple has been on the move and its price may be a little over inflated. My biggest issues with trading it are the high by-in, lack of dividend and that it hasn't split in 20 years.

AAPL is a classic growth stock, re-investing all its earnings instead of paying a dividend, this is a good thing, and clearly all that re-investment on R&D spend has won them significant market share in recent years. The problem with AAPL is that is always looks over valued on a price/earnings basis - the best way to value this company is to have a belief in its product lines and never expect it to pay a dividend.

 

[dakwar]

Nothing at all* - NASDAQ is an 'index' which is just a collection of lots of companies which - in theory - gives it a value that reflects the overall value of these companies, e.g. if the value of some of the companies in the index go down whilst others go up, the actual value of the index might remain the same.

However, sometimes the value of one 'component' of the index (in this example Apple) gets so big that it forms too much of a proportion of the index and as a result anything that happens to that one company has too much impact on the value of the index.

Imagine if a tech index consists of Apple, MS and Dell. When the index is set up, each company accounts for about a third of the value of the index. However, in time the value of Apple grows and the value of MS and Dell shrinks, so Apple now accounts for 80% of the value of the index; MS and Dell only 10% each. This would mean that whatever happened to the value of Apple (i.e. APPL share price) would have too much impact on the value of the index. To avoid this, the index would be restructured to ensure each company made up about 1/3 of the index again.

Indexes aren't really shares. In simple terms, it's just a package sold to you that is based on the value of the shares in the companies that make up that index. It's a way of spreading your risk over several different companies without having to buy and manage the shares in each individual company. Grouping all the companies in a particular market sector (such as tech companies) together to form an index also gives an indication of how that sector is performing overall, without having to analyse all the different companies that make up that sector.

*The reality is a bit more detailed than that, but hopefully that explains that nothing is actually happening directly to APPL stock price.

I don't know much about indices and the stock market and so need to ask this: ...

Is it not true that to restructure the index to be less dependent on APPL stock price, the index would have to sell however many shares of APPL they think they need to shed? And if they have to sell, and I'm assuming they would need to sell a large volume of APPL stock, would this not be directly responsible for affecting the APPL stock price?

Edit: and of course its AAPL and not APPL.

 

[mccldwll]

Its not to say that I would buy right now but Apple has been on the move and its price may be a little over inflated. My biggest issues with trading it are the high by-in, lack of dividend and that it hasn't split in 20 years.

"over inflated price"?

"high by-in" [sic]?

"hasn't split in 20 years"?

Sounds like you really don't know much about aapl or stocks in general.

 

[timbloom]

I don't know much about indices and the stock market and so need to ask this: ...

Is it not true that to restructure the index to be less dependent on APPL stock price, the index would have to sell however many shares of APPL they think they need to shed? And if they have to sell, and I'm assuming they would need to sell a large volume of APPL stock, would this not be directly responsible for affecting the APPL stock price?

This is an index, something that doesn't actually hold AAPL stock.

 

[Notaclone]

it hasn't split in 20 years.

They stopped doing dividends in 1995, and the last split was in 2005. I had the impression rampant stock splitting got popped along with the Bubble, so I can't single out Apple (ref http://www.google.com/finance?q=AAPL).
Still, I got burned on every investment ever made EXCEPT Apple. My Finance advisor told me I was insane for being so overweighted in Apple. Not my fault! I bought the same amount of Apple as all the rest. Can't help it that Apple outperformed and took over my portfolio. Wait, what? Isn't that what it did to NASDAQ and thus this adjustment?

 

[rscott4563]

I don't know much about indices and the stock market and so need to ask this: ...

Is it not true that to restructure the index to be less dependent on APPL stock price, the index would have to sell however many shares of APPL they think they need to shed? And if they have to sell, and I'm assuming they would need to sell a large volume of APPL stock, would this not be directly responsible for affecting the APPL stock price?

No, no and no...

The Nasdaq100 is an index/method of measuring the top 100 companies. It is NOT a collection of actual shares, they don't hold any shares and so can't sell any shares.

Try google or wiki

 

[pjfanelli]

No, no and no...

The Nasdaq100 is an index/method of measuring the top 100 companies. It is NOT a collection of actual shares, they don't hold any shares and so can't sell any shares.

Try google or wiki

This isn't entirely true. While the index doesn't contain any shares, there are ETFs (Exchange Traded Fund) and other instruments that ARE a collection of actual shares that are balanced to mirror indices. Thus institutions providing ETFs will be forced to sell AAPL shares to rebalance the ETF.

http://www.google.com/finance?q=NASDAQ:QQQ

 

[timbloom]

I bought the same amount of Apple as all the rest. Can't help it that Apple outperformed and took over my portfolio. Wait, what? Isn't that what it did to NASDAQ and thus this adjustment?

This is pretty much exactly what's happening here. Apples growth has outpaced it's counterparts in NASDAQ that it's now something like 20% of it's weight. It just needs to be adjusted so it has a more balanced view of the tech sector.

 

[rscott4563]

This isn't entirely true. While the index doesn't contain any shares, there are ETFs (Exchange Traded Fund) and other instruments that ARE a collection of actual shares that are balanced to mirror indices. Thus institutions providing ETFs will be forced to sell AAPL shares to rebalance the ETF.

http://www.google.com/finance?q=NASDAQ:QQQ

Yes but that isn't what was asked. There are obviously funds that trade based upon the Nasdaq100 or any other index such as the FTSE100 but this isn't anything like the actual index itself trading shares which was what the original post was alluding to...

 

[thelonelylimo]

Nothing at all* - NASDAQ is an 'index' which is just a collection of lots of companies which - in theory - gives it a value that reflects the overall value of these companies, e.g. if the value of some of the companies in the index go down whilst others go up, the actual value of the index might remain the same.

However, sometimes the value of one 'component' of the index (in this example Apple) gets so big that it forms too much of a proportion of the index and as a result anything that happens to that one company has too much impact on the value of the index.

Imagine if a tech index consists of Apple, MS and Dell. When the index is set up, each company accounts for about a third of the value of the index. However, in time the value of Apple grows and the value of MS and Dell shrinks, so Apple now accounts for 80% of the value of the index; MS and Dell only 10% each. This would mean that whatever happened to the value of Apple (i.e. APPL share price) would have too much impact on the value of the index. To avoid this, the index would be restructured to ensure each company made up about 1/3 of the index again.

Indexes aren't really shares. In simple terms, it's just a package sold to you that is based on the value of the shares in the companies that make up that index. It's a way of spreading your risk over several different companies without having to buy and manage the shares in each individual company. Grouping all the companies in a particular market sector (such as tech companies) together to form an index also gives an indication of how that sector is performing overall, without having to analyse all the different companies that make up that sector.

*The reality is a bit more detailed than that, but hopefully that explains that nothing is actually happening directly to APPL stock price.

Thank You.

 

[Chupa Chupa]

I assume this is goof for the Nasdaq in the long run, they must be worried about being to closely linked to Apple's fortunes rather than representing the range of companies on there.

So what does this mean for those of us who hold AAPL?

It's not a goof. Nasdaq has to keep its index balanced. It can't do that with once company hogging 20% of it's value. No sane money manager would allow a long term investor to hold 20% of any one stock, regardless of how "hot" it was, so why would Nasdaq want to overweight?

This means zilch to long term investors. Short term traders are hurt obviously. This is nothing more than a rebalancing of an index and says zero about Apple's future.

 

[pjfanelli]

It's not a goof. Nasdaq has to keep its index balanced. It can't do that with once company hogging 20% of it's value. No sane money manager would allow a long term investor to hold 20% of any one stock, regardless of how "hot" it was, so why would Nasdaq want to overweight?

This means zilch to long term investors. Short term traders are hurt obviously. This is nothing more than a rebalancing of an index and says zero about Apple's future.

I'm going to go out on a limb and say that I think talkingfuture meant good, not goof and that it was simply a typo...

 

[schwarzman]

This isn't entirely true. While the index doesn't contain any shares, there are ETFs (Exchange Traded Fund) and other instruments that ARE a collection of actual shares that are balanced to mirror indices. Thus institutions providing ETFs will be forced to sell AAPL shares to rebalance the ETF.

http://www.google.com/finance?q=NASDAQ:QQQ

Exactly, that means that big institutional investors (like insurances) that track the whole index, will sell Apple shares in the next months (not immediatly of course).

 

[rdowns]

So what does this mean for those of us who hold AAPL?

A buying opportunity as shares become available as fund managers rebalance their portfolios.

 

[jbutterfill]

Exactly, that means that big institutional investors (like insurances) that track the whole index, will sell Apple shares in the next months (not immediatly of course).

Thats not entirely correct - many passive index trackers will have to adjust their portfolios on the same day of the index rebalancing

 

[HiRez]

Nice way for all the chums in on this news in advance to buy up AAPL shares when the stock tanks briefly. While the normal long term AAPL shareholders get screwed.