Meta faces weight cut in special Nasdaq 100 rebalance

(Bloomberg) – When a “special rebalancing” of the Nasdaq 100 index was triggered to curb the dominance of the biggest tech stocks, Meta Platforms Inc. was the only megacap to fall below a crucial cutback threshold workforce. Now, it looks like the social media giant will be downsized anyway.

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Meta’s representation in the index flirts with 4.5%, the key level that six other companies broke when the gauge’s off-cycle adjustment was triggered on July 3. This means that if the weightings of these larger stocks were reduced and redistributed to other members of the index, the company founded by Mark Zuckerberg would be catapulted to the kind of size that the rebalancing was supposed to fight in the first place.

Instead, Meta will also have its weight revised.

The Nasdaq released pro forma data to clients on Friday revealing the adjustments index members will receive in the overhaul. They show that the company formerly known as Facebook will be downgraded alongside Apple Inc., Microsoft Corp., Alphabet Inc., Nvidia Corp., Amazon.com Inc. and Tesla Inc.

The details have been the subject of frenzied speculation among investors and market watchers, as fund managers with hundreds of billions referenced on the index will have to buy and sell in droves to mimic the changes. And although the rebalancing methodology is public, it is subject to various interpretations and has become a source of confusion.

At Wells Fargo & Co., the team originally expected Meta’s weight to be reduced. They later retracted that view, only to finally find that their initial take was correct.

“Meta was a little tricky. Initially the team thought it would be capped and then backed off on that,” said Chris Harvey, head of equity strategy at the bank. “It makes more intuitive sense that way” because if it’s not reduced, it would undermine the whole goal of fighting overfocus, he said.

Predicting the actual new megacap weightings remains a tricky business, as their market value will change daily until the rebalancing takes effect next Monday. Using July 3 as the base date and Monday’s pro forma data for the expected adjustment, the top seven voters would see their combined representation drop to 43.7% from 55.1%, according to a Nasdaq spokesperson.

Microsoft and Nvidia are expected to see the biggest reductions, each dropping about 3 percentage points to 9.8% and 4.3%, as a result. Apple will reclaim the top spot, with a relatively small drop of 1 percentage point to 11.5%.

The reduced Big Seven weightings will be spread across the rest of the index, Broadcom Inc., Adobe Inc., PepsiCo Inc. and Costco Wholesale Corp. benefiting the most.

The special rebalancing is intended to prevent managers of funds linked or referenced to the Nasdaq 100 from violating a regulatory diversification rule. To stay compliant with the restriction, an article on the Nasdaq website says the weights can be reduced if the combined influence of the largest companies — those that make up 4.5% or more of the gauge — total more than 48. %. A rebalancing can be decided to reduce the influence of the group to 40%.

This rebalancing is a consequence of Big Tech’s relentless rally which has accounted for almost all of the overall market gains this year. The very heavy nature of return momentum has made it difficult for fund managers to beat benchmarks like the S&P 500 and Russell 1000. Less than a third of large-cap funds tracked by Goldman Sachs Group Inc. outperform since the beginning of the year .

“The outperformance of the largest stocks and their increased weighting in benchmarks has resulted in a persistent underweighting of mutual funds in these stocks, which in turn has created significant headwinds to relative fund returns. “, wrote Goldman strategists led by David Kostin in a note. “The special NDX rebalancing is unlikely to solve the challenge that the current high market concentration poses to many benchmark investors.”

–With help from Joanna Ossinger.

(Updated to reflect Monday’s pro forma data from the eighth paragraph.)

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