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The NASDAQ Stock Market launched a new index last week that could eventually lead to a new ways to trade shares of smaller NASDAQ companies. The Nasdaq Q-50 ($NXTQ) is an index of fifty stocks that trade on the NASDAQ Stock Market, but that are not yet part of the NASDAQ 100 Index ($NDX). Therefore, these companies are not yet included in the popular PowerShares QQQ Trust (QQQQ). Instead, the new index includes fifty companies that are poised to enter the NASDAQ 100 sometime in the future.

The PowerShares QQQ Trust is the most actively traded security in the options market today. The fund was previously known as the NASDAQ 100 Index Trust, but PowerShares Capital Management took over sponsorship of the fund earlier this year and the name was changed. In addition, in 2004, the primarily listing for the QQQQ moved from the American Stock Exchange [AMEX] to the NASDAQ Stock Market. Shortly, thereafter, the symbol changed from three Qs to four.  

Sometimes called the Qs or the “cubes,” the PowerShares QQQ Trust is a play on the largest stocks that trade on the NASDAQ Stock Market. To be specific, the ETF holds all of the same companies that are included in the NASDAQ 100; which includes the top 100 non-financial companies from the NASDAQ Stock Market. When the fund was launched in the late 1990s, it was dominated by large cap tech stocks. However, since that time, the market values of many technology names have fallen dramatically and now the sector accounts for less than 60% of the value of the fund. Nevertheless, many traders still view the QQQQ as a play primary on technology.

The new NASDAQ Q-50 Index is listed under the symbol $NXTQ. (However, the quotes might not yet be available through all vendors). It includes fifty companies that are eligible for inclusion in the NASDAQ 100. That is, the exchange takes the top 50 stocks ranked by market capitalization. These companies are not financials, not already in the NASDAQ 100, and would be the next to be added in the index in the event that an existing NASDAQ 10 company is merged into another or if a company falls to far in market value to remain within the top NASDAQ stocks. The NASDAQ 100 Index is reshuffled once a year in December.

The NASDAQ Q-50 could potentially outperform the NASDAQ 100 for a couple of reasons. For one, the index includes smaller companies that tend to be more volatile and see faster profit growth. Examples of Q-50 stocks today include JDS Uniphase (JDSU), Novellus Systems (NOVL), and Imclone (IMCL). According to the NASDAQ, the average market value of the Q-50 index is only $3.9 billion, compared to a market value of almost $35 billion for the average NASDAQ 100 stock.

In addition, the components of the $NXTQ have the potential of benefiting from the so-called “index effect.” That is, when a stock is added to a prominent index such as the S&P 500 Index ($SPX), the Dow Jones Industrial Average ($INDU), or the NASDAQ 100, the news will trigger aggressive buying by funds and other investors that try to mimic the performance of that index. So, given that a lot of money is indexed to the NASDAQ 100 (PowerShares QQQ Trust is a $21 billion fund), the “index effect” will also help to boost the returns of the Q-50 index over time. According to the exchange, the Q-50 had an average return of 26% over the past five years, compared to 21.9% for the NASDAQ 100.

How can investors participate? According to a recent article on MarketWatch (“Cubes” ETF may get a little sibling by John Spence, Oct. 10, 2007), the NASDAQ has already “had conversations with financial institutions to launch ETFs and derivatives based on the Nasdaq Q-50.” So, over time, the market is likely to see a Q-50 index ETF and possibly options on the index or the fund, or both. That, in turn, will give investors a tool to trade popular NASDAQ stocks that are just below the top tier or large cap companies that currently dominate the Nasdaq 100 and QQQQ.


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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