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Tracking the Nasdaq

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The Nasdaq index is capturing everyone's interest, but there are precious few ways to invest in it. The performance of the Nasdaq has gone through the roof in the past few years. Created in 1971, it didn't reach 1000 until July 7, 1995; it took less than five to get from 1000 to 5000.

There are actually two separate Nasdaq indices: the composite Nasdaq (the one you always hear about on the news) and the Nasdaq-100. The composite Nasdaq tracks 4,818 stocks each day. The Nasdaq-100 tracks the top 100 Nasdaq stocks, including some heavy-hitting tech stocks like Microsoft, Qualcomm and Cisco Systems.

The composite Nasdaq is difficult to track by an index fund because of its size. Nearly 5,000 stocks would have to be managed in straight-forward index fund that tracks the composite Nasdaq 100%. The Nasdaq-100, however, is ideal for an index fund.

The first fund to track the Nasdaq-100 was the Rydex OTC (RYOCX), which launched in 1994. Unfortunately the fees and minimum investment are high for an index fund.

The Potomac OTC Plus (POTXC) and Profunds Ultra OTC (UOPIX) also track the Nasdaq, but they aren't straightforward indexes. They use leverage (for example, from futures) to surpass the index rather than simply match it. This means that an increase in the Nasdaq results in an exaggerated increase in the fund; the downside is that a Nasdaq drop results in exaggerated losses for the fund.

An alternative to these is QQQ, a year-old ETF (exchange-traded fund) put out by the Nasdaq-Amex Market Group, available from any broker.  By purchasing a share of QQQ, you invest in the Nasdaq-100 Trust, a unit investment trust that holds shares of the companies in the Nasdaq-100 Index. This fund has relatively modest fees of 0.18%. Since it functions like a stock, you must pay brokerage fees to buy and sell; for buy-and-holders, the low fees make it worth investigating.

A recent addition to the field is an offering from  California Investment Trust .  This fund charges a moderate expense ratio of 0.65% and has an initial investment of $5,000.  There is no minimum for IRA investments.  Note, however, that the fund is capping expenses at 0.65% for the first year so they may go up in the future.

The following table illustrates the differences between these funds:

Fund Name Ticker Expense Ratio Minimum Investment
Potomac OTC Plus POTCX 1.50% $10,000
Profunds Ultra OTC UOPIX 1.47% $15,000
QQQ QQQ 0.18% 1 share ($221.625 on 3/17)
Rydex OTC RYOCX 1.15% $25,000
CIT Nasdaq 100 N/A 0.65% $5,000

The Nasdaq has been leaping up and up for the past three years, which is usually a warning sign that a correction is due. Should you avoid the Nasdaq because it's volatile? Not necessarily. For index fund investors, the opportunity to own a large share of the market is the goal. Indexing is about long-term investment, and the realization that there may be some bumps in the road. The low fees of index funds mean that riding out a rough spot is feasible.


Which stocks are in the Nasdaq-100?

The Nasdaq-100 tracks the top 100 stocks of the composite, including 3Com, Cnet, eBay, Microsoft, Qualcomm, Starbucks, and Yahoo, among others. The following table lists the hundred stocks that make up the Nasdaq-100 (as of March 24, 2000) :

Company Name Symbol
3Com Corporation COMS
Adaptec, Inc. ADPT
ADC Telecommunications, Inc. ADCT
Adelphia Communications Corporation ADLAC
Adobe Systems Incorporated ADBE
Altera Corporation ALTR
Amazon.com, Inc. AMZN
American Power Conversion Corporation APCC
Amgen Inc. AMGN
Apollo Group, Inc. APOL
Apple Computer, Inc. AAPL
Applied Materials, Inc. AMAT
Applied Micro Circuits Corporation AMCC
At Home Corporation ATHM
Atmel Corporation ATML
Bed Bath & Beyond Inc. BBBY
Biogen, Inc. BGEN
Biomet, Inc. BMET
BMC Software, Inc. BMCS
BroadVision, Inc. BVSN
Chiron Corporation CHIR
CIENA Corporation CIEN
Cintas Corporation CTAS
Cisco Systems, Inc. CSCO
Citrix Systems, Inc. CTXS
CNET Networks, Inc. CNET
Comcast Corporation CMCSK
Compuware Corporation CPWR
Comverse Technology, Inc. CMVT
Concord EFS, Inc. CEFT
Conexant Systems, Inc. CNXT
Costco Wholesale Corporation COST
Dell Computer Corporation DELL
Dollar Tree Stores, Inc. DLTR
eBay Inc. EBAY
EchoStar Communications Corporation DISH
Electronic Arts Inc. ERTS
Fiserv, Inc. FISV
Gemstar International Group, Limited GMST
Genzyme General GENZ
Global Crossing Ltd GBLX
Herman Miller, Inc. MLHR
i2 Technologies, Inc. ITWO
Immunex Corporation IMNX
Intel Corporation INTC
Intuit Inc. INTU
JDS Uniphase Corporation JDSU
KLA-Tencor Corporation KLAC
Legato Systems, Inc. LGTO
Level 3 Communications, Inc. LVLT
Linear Technology Corporation LLTC
LM Ericsson Telephone Company ERICY
Lycos, Inc. LCOS
Maxim Integrated Products, Inc. MXIM
McLeodUSA Incorporated MCLD
MedImmune, Inc. MEDI
Metromedia Fiber Network, Inc. MFNX
Microchip Technology Incorporated MCHP
Microsoft Corporation MSFT
Molex Incorporated MOLX
Network Appliance, Inc. NTAP
Network Associates, Inc. NETA
Network Solutions, Inc. NSOL
Nextel Communications, Inc. NXTL
NEXTLINK Communications, Inc. NXLK
Northwest Airlines Corporation NWAC
Novell, Inc. NOVL
NTL Incorporated NTLI
Oracle Corporation ORCL
PacifiCare Health Systems, Inc. PHSY
PanAmSat Corporation SPOT
Parametric Technology Corporation PMTC
Paychex, Inc. PAYX
PeopleSoft, Inc. PSFT
PMC - Sierra, Inc. PMCS
QLogic Corporation QLGC
QUALCOMM Incorporated QCOM
Quintiles Transnational Corp. QTRN
RealNetworks, Inc. RNWK
RF Micro Devices, Inc. RFMD
Sanmina Corporation SANM
Siebel Systems, Inc. SEBL
Sigma-Aldrich Corporation SIAL
Smurfit-Stone Container Corporation SSCC
Staples, Inc. SPLS
Starbucks Corporation SBUX
Sun Microsystems, Inc. SUNW
Synopsys, Inc. SNPS
Tellabs, Inc. TLAB
USA Networks, Inc. USAI
VERITAS Software Corporation VRTS
VISX, Incorporated VISX
Vitesse Semiconductor Corporation VTSS
VoiceStream Wireless Corporation VSTR
Xilinx, Inc. XLNX
Yahoo! Inc. YHOO