Collective Brain

Mind Your Q's

Collective Brain

By far the most popular exchange traded fund (ETF) is the one that tracks the Nasdaq-100 Index, symbol QQQ. It has been this way since the Qs made their first appearance on March 10, 1999. On that day alone the assets grew from an asset base of about $15 million to about $250 million.

On December 17, 2001, Nasdaq rebalanced the fund, throwing out the stocks that had dropped below listing standards and replacing them with others. The mandate for Nasdaq-100 is to carry the largest non-financial stocks on that market; the sole determination is market cap size. So the index is a growth benchmark, discarding companies when their market capitalization shrinks. Although the index is about 65 percent below its high in 2000, it has performed well historically, beating the other major U.S. benchmarks for the 10-year period beginning December 1991. Since its inception, in 1985, the index has risen about 1,100 percent.

The Qs are the most actively traded ETF; the next most actively traded is the big SPDR (SPY), based on the S&P 500 Index. QQQ usually trades about twice as many shares as SPY. Part of the reason for its activity has to be its attraction for institutional traders and investors because of the ETF being a proxy for the market, especially the growth end of the market. An institution can get in or out or short the market quickly using the QQQs. Size is not really a factor, not with the index valuation keeping the ETF in line, and the specialists and arbitragers keeping things timely.


The biggest shift in the Qs is that the information technology sector has shrunk and the biotech and healthcare sector has grown. The most pronounced shrinkage was in the telecommunications sector; it shrunk from 19.1 percent to 12.3 percent. The computer sectors shrunk a small amount also. Biotech and health care jumped from 9.8 percent to 13.1 percent. Also there was a jump in "other" sectors, from 5.3 percent to 9.3 percent.

Some of the names discarded were well known past winners: Novell, CMGI, 3Com, Palm, Ariba. Some of the discarded companies were perennial QQQ members, having been on the list for more than 10 years. It is shocking that these past big winners have become today's castoffs. Names added include Invitrogen, Protein Design Labs, and Symantec. Many of the added companies have just recently grown to new highs. However, the computer-related companies still dominate the new Qs, representing 65.3 percent of the index.

Bottom Line

There is concern that these changes will mean less volatility in this index in the future. The Qs, along with SPY, have always offered a way to take a position in the market, particularly in the growth area, quickly and easily. Less volatility would be a detriment to most users, especially in the institutional arena. There is already talk of trading the technology SPDR (XLK) as a purer technology play.

Max Isaacman is a passive investment advisor and the author of How To Be An Index Investor.