News from Reuters about a “special rebalance” happening in the Nasdaq 100 index is making headlines – but what does it mean for investors who use benchmarks and indexes to drive their performance?
The Nasdaq exchange operator (NDAQ) is taking this step to reduce the dominance of heavyweight companies that currently account for almost half of the index’s weight.
This year, the Nasdaq 100 index has experienced a significant 37.5% surge, largely driven by the remarkable rally in growth and technology stocks. In comparison, the benchmark S&P 500 (SPX) has seen a more modest gain of 14.8%.
Companies such as Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Amazon.com (AMZN), and Tesla (TSLA) currently hold a combined weight of 43.8% in the index as of Monday’s close. However, as part of the rebalance, their collective weight will be reduced to 38.5%. The concern behind this special rebalancing is that these few major names are potentially distorting the overall health of the stock market.
The changes in the index will be based on the number of shares outstanding as of July 3. Nasdaq announced the adjustments on July 14, and they will take effect before the market opens on July 24.
A special rebalancing like this is part of Nasdaq 100’s methodology to comply with a U.S. Securities and Exchange Commission rule on fund diversification. This has occurred twice before, in 2011 and 1998, the global head of index product and operations at Nasdaq. If the aggregate weight of companies with more than 4.5% weight in the index exceeds 48%, a special rebalancing is triggered. During the rebalancing, this weight is capped at 40%.
Microsoft has the highest weight at 12.91%, followed by Apple at 12.47%, Nvidia at 7.04%, Amazon at 6.89%, and Tesla at 4.50%, according to Refinitiv data. The recent surge in Tesla’s shares pushed the aggregate weight above 48%, prompting the rebalance.
The article also discusses the possibility of a similar rebalancing in the S&P 500, which takes place when the aggregate weight of companies with a weight greater than 4.8% exceeds 50% of the total index, according to S&P Dow Jones Indices.
The changes in the Nasdaq 100 index are expected to impact investment funds that track it, including the popular $200 billion Invesco QQQ ETF (QQQ). The rebalancing will likely require portfolio managers to increase their positions in smaller companies, potentially boosting their share prices.
Following the news, Apple and other mega-cap stocks experienced some declines. Apple, which had recently reached a market capitalization of $3 trillion, fell 1% on Monday, while Microsoft, Alphabet, and Amazon also saw declines ranging from 0.7% to 2.5%.