The dramatic rally in technology shares this year has raised concerns about overconcentration within the Nasdaq 100 stock index. With tech giants like Apple, Microsoft, and others dominating the market, the index provider, Nasdaq, has recognized the need for a solution. However, the proposed “special rebalance” presents a new challenge for the market’s Big Seven.
The Role of Big Tech in the Nasdaq 100
One of the key contributors to this year’s surge in tech stocks has been the market’s most valued tech companies, as determined by market cap. While this has been great for these tech giants, it has created a problem for the Nasdaq 100, which tracks the 100 largest companies trading on Nasdaq.
Nasdaq’s Solution: A Special Rebalance
To tackle the issue of overconcentration, Nasdaq has announced plans for a special rebalance of the weightings within the Nasdaq 100. This action is aimed at addressing the excessive focus on a few companies within the index. Given that exchange-traded funds (ETFs) tracking the index had over $300 billion invested by the end of 2021, this development carries significant implications. The popular Invesco QQQ ETF (QQQ), which follows the Nasdaq 100, alone holds assets worth over $200 billion. Consequently, indexers will need to adjust their holdings by selling some of their positions in the largest constituents and increasing their exposure to other stocks.
The Impact on the Nasdaq 100
While the Nasdaq 100 has enjoyed a remarkable 37% increase in value this year, much of this growth can be attributed to the substantial gains made by its dominant stocks. Currently, Microsoft holds the largest weighting at 12.9%, closely followed by Apple at 12.5%. Other major contributors include Alphabet (7.4%), Nvidia (7.0%), Amazon (6.9%), and Tesla (4.5%).
In summary, the Nasdaq 100’s response to overconcentration is an important step to ensure a more balanced representation of the entire market. By adjusting weightings and encouraging diversification, the rebalance aims to enhance the stability and resilience of the index in the face of evolving market dynamics.
Nasdaq to Conduct Special Rebalance for Index Weights
Nasdaq, a prominent stock exchange, has announced that it will be conducting a special rebalance for its index. This move is deemed necessary to uphold the integrity of the index, following Nasdaq’s stated methodology.
The special rebalance, which has only been done twice before in December 1998 and May 2011, is triggered when all stocks with a weight of over 4.5% in the index surpass a threshold of 48%. According to Nasdaq rules, the rebalancing process will then adjust the aggregate weight of stocks with a weight of 4.5% or more to a target of 40%.
Considering the significant surge in the six stocks that currently exceed the 4.5% level, it is highly likely that their weights will be adjusted accordingly. Apple has seen a remarkable 45% increase this year, followed by Microsoft with a 38% rally, Alphabet with a 32% rise, Amazon with an impressive 51% surge, Nvidia with a staggering 188% gain, and Tesla with an impressive 118% growth.
The special rebalance will utilize index and stock prices as of July 3. Further details about the rebalancing process will be announced on July 14 and will officially take effect on July 24.
In the meantime, shares of Apple, Microsoft, Alphabet, Amazon, Nvidia, and Tesla have experienced slight declines ranging between 1.2% and 2.5% on Monday. However, Meta remains unchanged and receives support from investors due to their enthusiasm for the recent launch of Threads, a new social network competing with Twitter.
