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Apple, Nvidia and other tech stocks tumble after rebalancing announcement.
Stephanie Keith/Bloomberg
Apple
.
Microsoft
,
and the rest of the big tech has outgrown the Nasdaq 100 – and the index provider has a solution to the problem. Unfortunately, this solution is a problem for the Big Seven in the market.
A wrinkle to this year’s spectacular rally in tech stocks has been the huge role played by the market’s most-valued tech companies in terms of market capitalization. This created a particular problem for the Nasdaq 100 stock index, which tracks the 100 largest companies that trade on the Nasdaq.
As a solution, the Nasdaq announced plans for a “special rebalancing” of weightings on the Nasdaq 100 later this month to address “over-concentration” in the index. This is no minor development: according to the Nasdaq, there were more than $300 billion in exchange-traded funds tracking the index at the end of 2021, and the total is now undoubtedly considerably higher. The Invesco QQQ ETF (QQQ), which tracks the Nasdaq 100, alone has more than $200 billion in assets. Indeed, the indexers will have to sell part of their holdings in the main constituents of the index and add to their positions in other stocks.
The Nasdaq 100 is up 37% this year, helped by huge gains in stocks that dominate the index. The largest stocks by current weighting include Microsoft (12.9% of the index), Apple (12.5%),
Alphabet
(7.4%),
Nvidia
(7.0%),
Amazon
(6.9%) and
You’re here
(4.5%).
Nasdaq’s stated methodology states that “a special rebalancing may be performed at any time…if deemed necessary to maintain the integrity of the index.”
The Nasdaq has only performed a special rebalancing twice before, in December 1998 and May 2011. Nasdaq rules state that if all stocks with a weighting of more than 4.5% in the index exceed 48% , the Nasdaq rebalances the indicator. According to Nasdaq rules, the rebalancing process sets the total weight of stocks with a weighting of 4.5% or more to 40%.
Given the strong rally of the six stocks that were at or above the 4.5% level at the last rebalance, it seems likely that all six will see their weighting adjusted accordingly. Year-to-date, Apple is up 45%, Microsoft is up 38%, Alphabet is up 32%, Amazon is up 51%, Nvidia is up 188%, and Tesla is up 118%.
The special rebalancing will be based on indices and stock prices beginning July 3. Details will be announced on July 14 and come into effect on July 24.
Shares of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Nvidia (NVDA) and Tesla (TSLA) all fell between 1.2% and 2.5% on Monday;
Meta
is unchanged, benefiting from the support of the enthusiasm of investors for the recent deployment of Threads, a new social network in competition with Twitter.
Write to Eric J. Savitz at eric.savitz@barrons.com