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The New Nasdaq

Posted By Barry Ritholtz On April 5, 2011 @ 7:06 am In Index/ETFs | Comments Disabled

Nasdaq OMX is rebalancing the Nasdaq-100 index (QQQs), which currently has one company — Apple (AAPL) as more than 20% of the index.

The WSJ [1] notes “Apple’s market capitalization is roughly $300 billion, twice that of Google. But its weighting in the index was five times that of Google. After the rebalancing, Google’s share of the index will be 5.8% compared to Apple’s 12.3%. Apple will remain the largest component of the index.”

No one should be surprised at this — it is long overdue. If I were running this, I would place a cap on the size any single stock can be in the index at 10%. Rebalance quarterly when it exceeds that level; monthly if it is exceeds it by 3%.

Beyond that, it is simply imprudent for any index to be a proxy for a single stock. The point of indexes is a broad based representation of a given sector or industry.

Apple has risen 4-fold over the past 2 years. Quite bluntly, it is surprising the OMX has waited this long . . .

courtesy of WSJ [1]

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URL to article: http://www.ritholtz.com/blog/2011/04/the-new-nasdaq/

URLs in this post:

[1] WSJ: http://online.wsj.com/article/SB10001424052748704587004576243231566493842.html

[2] Image: http://www.ritholtz.com/blog/wp-content/uploads/2011/04/NASDA_NS_20110404183313.jpg

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