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It's a phenomenon Internet.com stock analyst Tom Taulli refers to as "doing a Lucent," as former high-tech highfliers are crashing with alarming frequency. Lucent Technologies (LU), which announced on Oct. 23 that it was dumping its CEO to cure its litany of ills, has lost 70% of its value since July. In an even more sudden fall from grace, networking-equipment giant Nortel Networks (NT) lost nearly 30% of its value on Oct. 25 after posting third-quarter sales growth that was just slightly weaker than some analysts had expected. In this tough environment, the Nasdaq-100 Index Tracking Stock -- better known by its symbol, QQQ, or just as "the Qs" -- can make an attractive alternative to do-it-yourself stock-picking. Only a year and a half old, the investment hybrid, called an exchange-traded fund, or ETF, is similar to an index fund and mirrors the Nasdaq-100, the top 100 stocks in the Nasdaq Composite index. EASY EXIT. But you can trade in and out of the Qs throughout the day, and the price ebbs and flows with the market. That's in contrast to regular open-end mutual funds, which are priced only once a day to reflect changes in the closing prices of the stocks in the fund. With about $16 billion in assets, the Qs is highly liquid. More than 30 million shares changed hands on Oct. 25, making this far and away the most actively traded stock on the American Stock Exchange. Given the massive intraday swings in tech stocks lately, the ability to buy in at a specific price at a given time, perhaps during a morning dip, is a real plus. Traders find the Qs a handy investment tool to keep in their bag of tricks for a variety of uses. But even for long-term investors, QQQ provides instant diversification across 100 names, mostly growth ones, and an easy exit from the game of trying to dodge bombing stocks. "I'd rather buy an ETF, so I don't make a mistake with one stock," says Max Isaacman, a money manager and author of How to Be an Index Investor (McGraw-Hill, May, 2000). "You don't want to see the stock market take off and your stock is down 40% due to an earnings disappointment." While QQQ may offer protection against that nightmare, it's not a cure for volatility. On Oct. 25, it fell 4.6 points, or 5.5%, to close at 77.88 -- almost as much as the 5.6% drop in the Nasdaq Composite and nearly double the 2.45% decrease in the Standard & Poor's 500 index. The Qs has declined 35% from a high of $120.50 in late March. READY FOR A REBOUND. One look at the top-10 holdings, and it's easy to see where both the high returns and the volatility come from. No. 1 Cisco Systems (CSCO) makes up 7.52%, Intel (INTC) weighs in at 7.43%, Microsoft (MSFT) is 6.87%, Oracle (ORCL) 4.72%, JDS Uniphase (JDSU) 4.04%, and Sun Microsystems (SUNW) 2.98%. The shares are about 76% technology, but some nontech names like Starbucks (SBUX), Bed Bath & Beyond (BBBY), and Costco Wholesale (COST) have made it into the Qs as well. Since it's weighted to the highest-quality companies, the Qs is a good way to position your portfolio for a snap-back in technology, Taulli says. "It is really hard to call when a bottom will hit, but the companies that will come back first are higher-quality companies with the big institutional followings. If you're playing the rebound, you always go to quality." But if you're convinced the bottom hasn't hit yet, you can sell the Qs short to bet tech stocks will fall further. Shorting the Qs is a good hedge against additional declines in tech stocks that you can't or don't want to sell right now, says George Fontanills, president of Pinnacle Investments of America. Now he's doing bullish trades on the Qs. "We do think we've bottomed out a little," he says. OTHER OPTIONS. Of course, the question looming for investors is whether technology is a good place to be at all right now (see BW Online Special Report, "The Tech Wreck: How Bad Is It?"). Isaacman says he currently favors a different ETF, Standard & Poor's Depositary Receipts (SPY), which is about 30% technology. "You get growth, and you get a lot of the same companies," but the stocks aren't as high-priced, he says. Long-term tech investors who want to make periodic investments or withdrawals would also probably be better served by buying a regular no-load index fund. Then they wouldn't have to pay a trading commission every time they add or withdraw funds. Still, for technology stalwarts, the Qs offers a nimble way to bet on the fortunes of the sector while dodging the dangerous job of picking winners and avoiding losers. Stone is an associate editor at Business Week Online EDITED BY BETH BELTON |
