Nasdaq Special Rebalance Will Create Winners and Losers
The Nasdaq press release didn’t provide much information, but index investors have been talking about the need to reweight large-cap funds for years. Later this month, the Nasdaq 100 will be rebalanced. Unlike the Russell Indexes, which have an annual rebalance process, this will be only the third time in history. The last Nasdaq 100 reweighting was in 2011. This will affect stock prices, potentially, by quite a bit.
The seven big tech stocks like Apple (AAPL), Microsoft (MSFT), and Meta (META) have market caps that rival entire stock exchanges outside of the US. The popular stock indexes, including the Nasdaq 100, weights stocks with a larger market cap more heavily than those with lower market caps. The result is the movement of these indexes don’t necessarily reflect the movement of the stocks within the index. In the case of the Nasdaq 100, ninety-three other stocks taken together are weighted by only 44.5%.
The rebalancing is expected to trim the weighting of at least six of the seven largest stocks in the index and increase the weighting somewhat of many others. Similar to what occurs each June during the Russell Index Reconstitution, index fund managers will have to sell those stocks that experience reduced weight and buy those stocks that have increased weighting in the benchmark index.
The Big Seven that Are Likely to be Trimmed
Microsoft (MSFT)………..12.9%
Apple (AAPL)………..12.5%
NVIDIA (NVDA)……….7.0%
AMAZON (AMZN)……….6.9%
Alphabet (GOOG)……….3.7%
Alphabet (GOOGL)……….3.7%
Tesla (TSLA)……….5.5%
Meta Platforms (META)……….4.3%
The seven-largest companies in the Nasdaq 100 impact 55.5% of the index’s movement. This combined weighting will be lowered. Investors can also expect relative weighting shifts within these upper echelons.
Current Weighting and Methodology
The Nasdaq 100 index is a modified market-cap-weighted index. Overall Market valuation is the largest factor, but with oversight and review of concentration to help benefit users of the index.
Currently, MSFT has the largest weight. AAPL, which has a larger market cap than MSFT has a lower weight. Alphabet has the next highest weighting with the GOOGL and GOOG share classes combined. NVDA recently jumped to a 7% Nasdaq 100 weight, just ahead of AMZN. Tech/car company TSLA, and META are the final two represented in the top seven that are expected to end the month with some of their current weighting being added to stocks with smaller market values.
Key Dates and New Methodology
The Nasdaq 100 includes the 100 largest non-financial Nasdaq components.
The weighting changes will be announced on Friday, July 14, after the market close. The current 100 tickers will all still be intact.
The Nasdaq 100 special rebalance will take place before the Nasdaq open on Monday, July 24, to “address overconcentration in the index by redistributing the weights.” This has only happened twice before, in December 1998 and May 2011.
The combined weight of the five companies with the largest market caps, will be set to 38.5. The top four alone, have a combined weight of 46.7%. So these company’s can expect meaningful reductions. Nasdaq has also adjusted its methodology to state that no company outside the top five can have a market cap exceeding 4.4%. This implies that Tesla will also experience a little trim in its weighting.
Why it’s Important
With 17% additional weighting to be shared down the line in the Nasdaq 100 index, there may be a huge shift in individual stocks. The official new weightings are to be released Friday July 14, based on July 3 market data. This will include companies that see an increase in weighing.
According to Nasdaq, more than $300 billion in exchange-traded funds tracked the index as of the end of 2021, that number has since risen considerably. Currently, QQQ, the Invesco Nasdaq 100 ETF (QQQ), by itself, has over $200 billion in assets. Index fund managers using the benchmark will need to sell some of their holdings in the largest constituents of the index, and add to their positions in other stocks, based on the Nasdaq readjustments that we will learn about after the close on Friday July 14.
Managing Editor, Channelchek
Sources
https://www.barrons.com/articles/nasdaq-100-special-rebalance-apple-stock-price-98515240