Nasdaq index rebalancing slashes Apple's influence

NEW YORK Tue Apr 5, 2011 5:41pm EDT

The Apple logo is seen through raindrops on a window outside of the New York flagship Apple store, January 18, 2011. REUTERS/Mike Segar

The Apple logo is seen through raindrops on a window outside of the New York flagship Apple store, January 18, 2011.

Credit: Reuters/Mike Segar

NEW YORK (Reuters) - Nasdaq's late-night announcement to adjust weightings in the benchmark Nasdaq 100 Index spurred volatility in Apple shares and surprised U.S. fund managers, who questioned the timing of the news.

Apple Inc will be the most affected by the move, with its weighting slashed nearly in half, though it will remain the largest component of the index. As word spread of the changes, Apple shares dipped in premarket trading, before recovering during regular U.S. trading hours.

The rebalancing is not unusual, but Nasdaq OMX announced it at around 3 a.m. (0700 GMT) on Tuesday, making early trading more unpredictable.

"It's surprising and unsettling that the Nasdaq would release this information in the middle of the night, let alone at this moment in the calendar -- right ahead of earnings season," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati.

The rebalancing will have the biggest effect on the largest components of the index. Unlike Apple, bellwethers Microsoft, Cisco and Oracle will see their influence in the index rise.

Apple, which has a market capitalization of $314 billion, will see its weighting drop to 12.3 percent from 20.5 percent.

In all, 82 components will see their weight lessened when the rebalancing takes effect on May 2. More than $330 billion in funds and $40 billion in exchange-traded funds benchmarked to the Nasdaq 100 will have to adjust their portfolios.

Other asset managers are likely to try to get in front of the rebalancing in the interim by buying and selling affected stocks, anticipating activity by indexers.

"In the short term, this is going to have a significant impact and create additional volatility," said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York.

Apple shares fell around 3 percent in premarket trading and Nasdaq futures dropped at the opening bell. Shares of Apple reversed during the day, ending down 0.7 percent at $338.89.

"This is just a temporary blip. It won't impact the long-term story of the stock," said Jerome Heppelmann, portfolio manager and chief investment officer at Old Mutual Focused Fund.

John Jacobs, executive vice president in Nasdaq's global index group, said Nasdaq timed the release in order to be ahead of the market open in Europe, where the Nasdaq-100 Trust exchange-traded fund also trades. Nasdaq-100 futures trade around the clock on CME Globex.

Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey, said the market was taken by surprise, nonetheless.

"It definitely was not expected and I don't think it was in any way, shape or form priced into the market," he said. "Some people might have suspected a move of this magnitude might have been telegraphed a little more intentionally."

Microsoft Corp's weighting will rise 4.9 percentage points. Its stock closed up 0.9 percent at $25.78.

Oracle Corp's weighting will rise to 6.7 percent from 3.3 percent, Intel Corp's will increase to 4.2 percent from 1.8 percent, and Cisco Systems will rise to 3.7 percent from 1.6 percent.

"You'll see additional volatility from this news, especially given that the Russell Index will also go through its reconstitution in May and June," Wirtz said.

James Angel, a Georgetown University professor who specializes in financial market regulation and sits on the board of directors of the Direct Edge stock exchange, said there should be advance notice of a planned index change.

However, he said Nasdaq might be trying to avoid some of the gaming that has occurred in the rebalancing of the Russell 2000 by giving less notice.

(Reporting by Ed Krudy; additional reporting by Jennifer Ablan, Herb Lash, Ryan Vlastelica, and Chuck Mikolajczak; Editing by Kenneth Barry, Leslie Adler and Jan Paschal)

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