What happens when 10 million shares of your favorite stock get dumped into the open market in less than a week? Can share price survive that kind of hit?
That's what happened to Apple (AAPL) earlier this year. Passive index funds tied to the Nasdaq-100 index were required to chuck just under half their positions by May 2.
To review, Nasdaq OMX rebalanced its Nasdaq-100 Index, giving a far smaller weighting to the dominating Apple. Apple had become almost 21% of the index. Apple overshadowed the index due to share price appreciation, giving the company a greater weighting than suggested by its market capitalization. By May 2, Apple's position was sliced to 12%, pressuring its share price.
Nasdaq licenses the Nasdaq-100 to Invesco. Invesco's PowerShares QQQ index (QQQ) was forced sell millions of Apple shares. Ditto, other ETFs that track the Nasdaq-100 had to sell. Nasdaq OMX in its presentation estimated ETFs would sell 10 million Apple shares.
The result: April literally showered Apple shares.
The QQQ replaced them with millions of Microsoft (MSFT), Oracle (ORCL), Google (GOOG), Yahoo (YHOO) and Intel (INTC) shares, to bring those equities into alignment with their market caps.
I don't know about you, but May was tense.
Now that five months have passed, Apple hasn't only recovered, it's been on a tear, outperforming the Nasdaq 100. Ironically, had NASDAQ kept Apple's weighting intact, the QQQ would have enjoyed a much nicer ride. NASDAQ boosted Microsoft, Oracle, Cisco, Intel, Yahoo and Google share of the QQQ, five companies whose performance has been disappointing. Essentially, the ETF swapped a premiere growth story for lesser quality merchandise. In the end, Apple has outperformed a reweighted and arguably more ponderous QQQ.
Imagine how any other equity but Apple would have fared if passive ETFs suddenly deluged the market with that kind of volume. It is testimony to Apple's strength that shares recovered so vigorously.
Apple now makes up 14% of the QQQ, owing to its share price rise since May. It's still a long way away from reaching levels that would prompt another round of Nasdaq rebalancing. However, the next time Apple shares are cut from the indexes, I will be a lot less concerned.
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