Buying Nasdaq stocks has become chic again. But it simply isn't done the same way anymore.The Nasdaq 100 Investment Trust, also known by its ticker QQQ, (AMEX:QQQ - News)has topped the biggest firms traded on the Nasdaq, at least in terms of average daily volume.At roughly 73 million shares a day, the exchange-traded fund (ETF) beats outMicrosoft, Intel, CiscoSystems, DellComputer andAmgen, the five biggest companies traded on the Nasdaq. In dollar volume, QQQ reigns as well. Only S&P 500 Depositary receipts, or Spiders, have higher average dollar volume - $4.6 billion daily vs. QQQ's $2 billion.QQQ debuted on March 10, 1999. It trades at roughly one-40th the value of the Nasdaq 100, an index of the 100 biggest nonfinancial stocks on that market. Trading QQQ shares gives an investor exposure to large companies in the software, chip, Internet, biotech and telecom industries."It's moved from a trading vehicle to a very strong buy-and-hold instrument," said John Jacobs, CEO of Nasdaq Financial Products in New York.Investors can buy shares on margin, hold them for as long as they wish and sell shares short. There are also options and futures. In March 2000, QQQ had about 100 million shares outstanding, and the average daily volume was 60 million shares, Jacobs says.QQQ shares out have risen to 700 million, while average daily volume has climbed to 72 million.All these features give QQQ tremendous liquidity and make it popular among money managers, especially those who hedge.Nasdaq officials say it's hard to gauge who trades QQQ, but participation seems to have broadened. As of late 2002, 19% of QQQ shares were held by institutional investors, according to SEC filings. Many investors saw their large gains from individual tech stocks crushed after the Nasdaq peaked in March 2000. But the Nasdaq has recently outperformed the major indexes after recent data showed a nascent recovery in information technology spending. QQQ offers small and large investors an opportunity to participate in the tech recovery without single-stock risk.QQQs are popular for other reasons. Unlike most mutual funds, which are priced once a day, QQQ trades real time throughout the whole equity trading session. While many mutual funds require a minimum investment of $1,000 or more, an individual could buy as little as one share - for just over $28 as of Wednesday.Suitable For You?Some market experts question whether QQQ is the most efficient vehicle for buy-and-hold investors.Burton Malkiel, author of the recently revised "A Random Walk on Wall Street," argues ETFs "are unsuitable for investors who will be accumulating index shares over time in small amounts. No-load mutual funds will better serve such investors. I recommend that you leave ETFs to the speculators who think it is advantageous to buy or sell ETFs at any hour of the day and to buy such funds on margin."While you're getting a diverse set of companies, you also have to swallow costs including broker fees and spreads between bid and ask prices, Malkiel says. Decimalization, however, has squeezed the bid-ask-spread on QQQs to virtually zero.Professional investors in options have gone hog wild over the product. Open interest on QQQ is far superior to options on other ETFs, allowing big investors plenty of liquidity needed to execute large trades and small investors better pricing."The QQQ is my favorite instrument," said George Fontanills, a money manager and president emeritus of Optionetics. He also co-wrote "The Volatility Course."Fontanills points out that a number of options strategies on QQQ - including writing covered calls, collars on long positions, and the bull call spread - let investors profit at less risk than buying an individual tech stock. A tech company that misses earnings estimates can plunge 20% on a single day. It's highly unlikely QQQ would do that.Time ClockCalculating the value of the Nasdaq 100 index stops at 4 p.m. Eastern time every day. But QQQ shares trade until 4:15 p.m. While the QQQ value at 4 p.m. hardly differs from the Nasdaq 100, the extra 15 minutes of trading have produced more than a dozen cases this year in which the difference in percentage price change between QQQ at 4:15 p.m. and the Nasdaq 100 at 4 p.m. was 50 basis points or more.On March 17, the day the major indexes followed through on the fourth day of a new rally, the Nasdaq 100 powered up 4.52%. But QQQ rallied only 3.42% - 110 basis points less. Three sessions before, the Nasdaq 100 gained 1.22%, but QQQ rose 1.81% - 59 basis points higher.Few can exploit this spread. For starters, buying shares in all 100 components of the Nasdaq 100 involves large transaction expense and execution risks. Plus, only brokerage firms have the right to create and retire new shares of QQQ."You have very savvy brokers looking at these products all the time," said Deborah Fuhr, executive director of global ETF research at Morgan Stanley in London. "So the opportunity to (arbitrage) is really rarely there. Does it exist? Yeah, from time to time. Is it an opportunity in which people can make a lot of money? No."If there's an opportunity, it's not going to last very long. And then it comes to executing on it."
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