Why Facebook In The 'Q’s' Doesn’t Matter

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Facebook finally became part of the PowerShares QQQ Trust (NasdaqGM:QQQ) this week, and if you too heard the deafening silence, you're not alone.

Part of the tepid reaction is that Facebook now makes up just 1 percent of the index. Sure, that's more than zero, but it's not an impressive enough number like Apple's 16 percent weighting in QQQ to actually impact someone's decision whether or not to buy the fund. Or at least, it shouldn't be.

And to think, because of the Nasdaq-100 Index's seasoning rules, we had to wait seven months for such an inconsequential weighting, when other ETFs added Facebook shares almost immediately after the firm's initial public offering in May.

Of course, waiting may have served shareholders in the "Q's" rather well.

After all, Facebook's IPO was a huge flop. It opened at $38 and almost immediately plummeted, finally reaching a low of $17.73 on Sept. 4 for a peak-to-trough loss of more than 50 percent.

But even SOCL hasn't shown huge reactions to moves in Facebook.

That's the beauty of indexing-you diversify away most single-security risk to instead isolate the market risk of the market you're targeting.

What I'm getting at is that if you're deciding whether to buy QQQ, looking at its new Facebook position is the wrong place to start.

Instead, I'd recommend looking at its portfolio in depth and figuring out whether the allocations as a whole make sense to you. For example, do you really want the 67 percent allocation to technology that the "Q's" serve up?

That's a blog for another day, and until then, it's important to thoroughly think through why you might want to own Facebook and, from there, how.

At the time this article was written, the author held no positions in the securities mentioned. Contact Carolyn Hill at chill@indexuniverse.com.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: EIPO , FDN , FPX , PYH , QQQ

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