Nasdaq 100 index changes Monday

By Matt Krantz
USA Today

The beating in tech stocks this year is forcing the Nasdaq to make some dramatic changes to its well-known Nasdaq 100 index.

Nasdaq will announce Monday which stocks are being cut from and added to the index. This is of special interest to investors because the Nasdaq 100 is the basis of the QQQ exchange-traded fund, which has lured more than $36.4 billion in assets since 1999.

The Nasdaq 100 might have come to symbolize tech, but the new index will likely be tied more to health care than before, analysts say. That's a shift from past changes to the index, when flameouts were replaced with the latest tech darlings.

The shift might miff some.

"Investors who feel they need pure tech exposure will look elsewhere," says Mike Byrum, chief investment officer of Rydex Funds.

Changes to the index will come days after Nasdaq's announcement yesterday that it will again enforce its $1-a-share minimum-listing rule Jan. 3. The rule was lifted Sept. 27 to prevent low-priced companies from being delisted because of panic selling after Sept. 11.

Expected highlights from Nasdaq 100 changes:

• Deletions. All 13 are expected to be techs such as former hotshots 3Com, Palm, CNet and CMGI, says Murali Ramaswami, global head of quantitative research for Lehman Bros., who arrived at his conclusion by simulating methods used by Nasdaq.
• Additions. Only three are expected to be tech. The rest will mostly come from health care and biotech, Ramaswami predicts. Drugs and biotech stocks accounted for 13.5 percent of the Nasdaq 100's value in 2001, but will be the third most important sector next year at 15.2 percent, Ramaswami says.

Companies that are likely to be added, he says, include ImClone, Sepracor, Invitrogen, Cephalon, Icos and Protein Design Labs.

Nasdaq makes changes to the 100 index at the end of the year, basing those changes on criteria such as market value, trading volume and the length of time a stock has traded as of Oct. 31.

In what might be a case of bad timing for some stocks that end up getting ejected, techs have been making quite a comeback. In fact, the Nasdaq 100, while still tech-laden, has soared 47 percent since Sept. 21 and gained 22.6 percent since October.

Investors planning to stick with the new Nasdaq 100 should lower their expectations, analysts say. As the index includes more sectors outside of tech, its performance will more closely track broader indexes like the Standard & Poor's 500, Ramaswami says.

The QQQ has lost 29 percent of its value this year vs. a 14 percent drop in the S&P. But its net asset value is only down 4 percent — and it's still the second most traded instrument on U.S. stock markets behind Cisco.