NASDAQ 100 Draws Investment Products

January 01, 1999

The new year saw the introduction of some new investment products based on the Nasdaq 100 index. Some products are already based on the Nasdaq 100 index, such as index funds from Potomac and Rydex, futures at the Chicago Mercantile Exchange and options at the Chicago Board Options Exchange. But unlike the Standard & Poor's index of 500 blue-chip stocks and the Russell 2000 small-stock index, the Nasdaq 100 isn't widely used by the mutual-fund industry for indexing purposes, partly because of its highly volatile nature.


On March 10, 1999, The Nasdaq-Amex Market Group launched an index share product based on the Nasdaq-100 Index. Similar to Standard & Poor's Depository Receipts, or SPDRS, the Nasdaq 100 product will enable investors to invest in all the stocks in the Nasdaq 100 index with one purchase. Shares of the unit investment trust are traded on the American Stock Exchange under the symbol "QQQ."

To meet the Internal Revenue Service's diversification requirements for unit investment trusts, Nasdaq revised its weighting system shortly before the start of 1999. Under the revised Nasdaq index, the combined weighting of the largest companies on the Nasdaq 100 can't add up to more than 48% of the index. Shortly before the revision, the five largest - Microsoft, Intel, Dell, MCI WorldCom and Cisco Systems - totaled 60%. After, they were to represent less than 40% of the index, said John L. Jacobs, a vice president of investor services at Nasdaq.

In another significant change, no individual stock will represent more than 24% of the total market value of the index. At one point in 1998, Microsoft grew to slightly more than 24% of the Nasdaq index, said Jacobs. The Nasdaq 100's weighting changes won't affect the Nasdaq Composite Index, a bigger and better known index featuring more than 5,000 companies.

The unit investment trust's shares broke the exchange's volume record for a new product's first trading day. Nasdaq-Amex said preliminary volume for the Nasdaq 100 Index Tracking Stock totaled 2.6 million shares, well above the old record for a new product of 1.7 million shares.


John Nuveen & Co. Inc. released a new index investment product on Feb. 25, 1999. The Nuveen Nasdaq 100 Index Portfolio is a defined portfolio with a four-year term that tracks the Nasdaq 100 index.

"[A defined portfolio is] essentially a way of buying either stocks or bonds in a fixed predetermined basket of securities that doesn't change materially, with some exceptions, for the life of the portfolio," said William Adams, Marketing Director of Nuveen Defined Portfolios. The advantages of such an investment include tax benefits, its compatibility with certain investment strategies that cannot be applied to mutual funds and lower required minimum investments, Adams said.

"It's also good for a lot of investors who prefer to [apply] buy-hold type disciplines to investing rather than have their investments managed on an active basis," he added.

"The reason we did that is because defined portfolios are a very convenient vehicle for investing in things that would otherwise be difficult to invest in. It's hard for investors right now to [invest in] the Nasdaq 100," Adams said. It is being offered primarily to investment professionals.

The name defined portfolio seems to imply a sort of permanence, but the Nuveen Nasdaq 100 Index Portfolio is set up as a regulated investment company (RIC). Thus, Nuveen is allowed to make changes to the content of the portfolio to coincide with removals, additions and re-weightings in the index on a quarterly basis, and the portfolio receives tax treatment that is similar to a mutual fund's.

First Trust Advisors L. P. is also releasing a defined portfolio based on the Nasdaq 100, but rather than covering the whole index, it includes only 15 of the index's 100 stocks.


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