Nasdaq expels casualties of hi-tech bubble

In come the stocks of the future - healthcare and biotechnology.

If 2001 was the year the technology boom died, tomorrow's reshuffle of the Nasdaq 100 index will be the final nail in its coffin.

In a major display of changing times, on Christmas Eve 13 former heroes of the bubble will be unceremoniously dumped from the top flight of global hi-tech, and replaced with little-known pretenders from the healthcare sector. Big names that helped shape the bull market years such as 3Com, Palm and Broadvision are being forced to yield to the likes of Invitrogen, ImClone and Sepracor, all biotech companies.

Unlike other big stock indices around the world, which conduct quarterly or half-yearly reorganisations of members, the Nasdaq 100 index performs only one reshuffle a year. It also differs from other indices in its selection criteria. Market capitalisation plays a big part, but Nasdaq Financial Products Services (NFPS) also applies a liquidity test. To stay in the premiership, a stock must have an average daily trading volume of 100,000 shares.

Through the late Nineties and 2000, technology ruled the scene almost unchallenged, and the Nasdaq became shorthand for the stocks that led the investment bubble to its dizzy heights. In its March 2000 heyday, the Nasdaq 100 reached its all-time high of nearly 4,700 points. By September this year it had tumbled more than 75 per cent to a low of just 1,126 points. This year it has shed more than 32 per cent of its value.

The destruction of so much value owes a great deal to the individual failures of many of the index's constituents. Novell, Realnetworks, CNET Networks and Level 3 Commun- ication suffered badly from investors' sudden loss of faith in the commercial potential of the internet. Others, such as Palm, Inktomi and 3Com, have tumbled with the wider economic slowdown.

Now it's the turn of stocks dominated by healthcare and the biotechnology revolution. In stark contrast with their internet contemporaries, the new breed of healthcare companies has done an admirable job of holding on to funding. Despite a generally bleak outlook for the US economy, the companies that will tomorrow take their place in the Nasdaq 100 have plenty of cash to keep their research rolling, and the market knows it.

The abrupt exit of the 13 stocks – all from the technology sector – coincides with another dramatic shift in investor sentiment. Although the Nasdaq was the first word on everybody's lips 18 months ago, interest dropped with its sharp decline. Index-tracker funds will tomorrow automat- ically trade an estimated $6bn (£4.2bn) to reflect the changes, but the overall amount of funds tracking the Nasdaq 100 is on the slide. About $30bn is indexed to its performance, a level analysts guess is about half what it was a year ago.

"The Nasdaq 100 now is just like the Dow Jones Industrial Average: it doesn't matter any more," said Dan Rivera, head of equities at American Express Financial Advisors. "It used to be sexy when people over-invested in tech, but those days are behind it now. It has lost the relevence."