Nasdaq to reshuffle stock weightings to reduce index volatility

nasdaqIn a move not seen very often, NASDAQ OMX Group, the company that owns and operates the Nasdaq stock index announced today the company would re-organize the weightings of certain securities in a bid to lower volatility.

Technology stocks that are traditionally more volatile will be adjusted to new lower weightings, and other stocks that are less volatile will now represent larger weightings.

 Apple Inc. (NASDAQ:AAPL) previously represented 20.49-percent of the total value of the Nasdaq-100 index, and now that weighting will be lowered by almost 40-percent down to only 12.33-percent of the index value.

The Apple stock specifically has been trading on a very volatile basis, constantly closing and opening with high variations from the previous trading day over the last couple of months.

Less volatile stocks like the Microsoft stock (NASDAQ:MSFT) will now be weighted more. The Microsoft stock will now represent 8.3-percent of the Nasdaq-100, up from only 3.41-percent.

The Microsoft stock has seen very little volatility over the last ten years. The company’s stock has largely been trading between the $30 upper limit and the $20 lower limit per share. In a bid to please investors with almost no stock price growth, Microsoft in fiscal 2005 started paying full quarterly dividends to investors, and even marginally increased the dividend almost each fiscal year. Microsoft currently pays a $0.16 per share dividend on common stock each quarter.

The new weighting scheme will force investment funds to recalculate their positions on securities in order to maintain their investment objectives.

Traders that use dispersion trading to benefit from high volatility and variations in stock index values will also be affected, and will need to immediately make adjustments to their portfolios when the changes take into effect.

Other technology stocks in the index that will see their weightings changed include Oracle (NASDAQ:ORCL), which will see its index weight increase to 6.68-percent from 3.38-percent. Intel’s (NASDAQ:INTC) weight will also increase to 4.2-percent from 1.75-percent.

Nasdaq OMX Group said the new class weightings will take effect starting May 2, 2011 and will affect all properties that use any Nasdaq property, including exchange traded funds (ETFs).

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Peggy holds a Bachelor Arts degree with honors in Economics from York University in Toronto, Canada. She is a Certified Management Accountant (CMA). She has also passed Level I of the Chartered Financial Analyst (CFA) Program. She is also a realtor. Write to [email protected]
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