The index behind one of the biggest ETFs on the market is getting a shakeup next week, creating a shift in the portfolios of many investors. The Nasdaq-100, which consists of roughly 100 of the largest non-financial companies that trade on the Nasdaq stock market, is about to change. The index is rebalanced once a year by Nasdaq, and this year is adding six new stocks while removing seven. The new lineup — which fluctuates around 100 stocks but isn’t pegged to exactly that number — takes effect on Monday. The index is the backbone of the Invesco QQQ Trust, one of the biggest ETFs on the market with more than $150 billion in assets under management. Investors who own the QQQ will see their own portfolios indirectly change as the massive fund rotates its holdings. Because the stocks listed on the Nasdaq are generally tilted towards technology, the QQQ ETF is sometimes used as a shorthand for the performance of the tech sector. However, that will be less true in 2023. While all seven stocks leaving the index could broadly be considered tech companies, the new additions include two oil names in Diamondback Energy and Baker Hughes, the latter of which transferred to the Nasdaq in December from the New York Stock Exchange. Real estate analytics firm CoStar Group and media company Warner Bros. Discovery are also not perfect fits within the tech sector. “That’s probably the biggest takeaway, is that we’re gaining a little bit of energy exposure. I think at the end of the day when you’re looking at the index, however, the lion’s share of sector representation is going to be made up of information technology, [communications] services and consumer discretionary — very similar to where it stands today,” said Ryan McCormack, senior factor and core equity ETF strategist at Invesco. Adding a little more diversity to the fund may not be a bad thing for investors. The QQQ has dropped more than 30% this year. Some of the stocks being removed from the fund have performed even worse, with DocuSign and Match Group each sliding more than 60%. Meanwhile, both energy names joining the index are comfortably in the black for the year, and GlobalFoundries has outperformed the semiconductor industry. Falling out of the index and the ETF is not necessarily a sign that these stocks are due for a long-term decline. McCormack said that since December 2010, the median 1-year return of companies that fell out of the Nasdaq-100 is roughly 10.5%, and 18 of those stocks have moved back into the Nasdaq-100 later.The Invesco QQQ Trust, which was launched in 1999, has an expense ratio of 0.20%.
