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Written by Sruthi Shankar and Medha Singh
(Reuters) – A “special rebalancing” of the index will take place later this month as Nasdaq looks to defocus the heavyweights that account for nearly half of the index’s weight.
A sharp rise in growth and technology stocks has lifted the Nasdaq 100 by 37.5% this year. This compares with a gain of 14.8% for the benchmark.
Microsoft (NASDAQ:), Apple (NASDAQ:), Nvidia (NASDAQ:), Amazon.com (NASDAQ:), and Tesla (NASDAQ:) collectively account for 43.8% of the weight in the index, according to Refinitiv data as of Monday’s close. As part of the rebalancing it will drop to 38.5%.
“There is some concern that this handful of names is distorting the overall health of the stock market, which is likely spurring private rebalancing,” said Art Hogan, chief market strategist at P Riley Wealth.
The adjustment will be based on shares outstanding from July 3, with the changes announced on July 14 and effective before the market opens on July 24.
What is special rebalancing?
Cameron Lilja, Nasdaq’s global head of index product and operations, said the special rebalancing, which is part of the Nasdaq 100 methodology for maintaining compliance with the SEC’s rule on fund diversification, took place twice before that, in 2011 and 1998.
A special rebalancing can take place at any time if the combined weight of the companies, which each weigh more than 4.5% in the index, is above 48%, according to the Nasdaq. During rebalancing, a maximum of 40% is set.
Microsoft has the largest weighting 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 rally in Tesla shares has pushed the total weight above 48%, leading to a rebalance, Wells Fargo (NYSE::) the strategist said in a client note.
Could it be the S&P 500’s next lawsuit?
Weightings in the S&P 500 are rebalanced when the total number of companies, each with a weight greater than 4.8%, exceeds 50% of the index’s total, according to the S&P Dow Jones Indexes.
Apple and Microsoft are the only two companies that weigh more than 4.5% in the S&P 500. The top five companies, with the biggest influence in the S&P 500 which also includes Amazon, Nvidia and Tesla, account for 22.2% of the index’s total market value.
An S&P spokesperson said they “do not normally comment on the actions of other index providers and potential changes to our indexes”.
What stocks could see an uptick in weight?
Wells Fargo Index Strategists appreciate Starbucks (NASDAQ :), Mondelez (NASDAQ :), Booking Holdings (NASDAQ :), Gilead Sciences (NASDAQ :), Intuitive Surgical (NASDAQ :), analog devices (NASDAQ:) and Automatic Data Processing (NASDAQ:) will see their weight gain in the Nasdaq 100.
Meanwhile, the influence of Microsoft, Apple, Nvidia, Amazon, Tesla, Meta Platforms and Alphabet (NASDAQ:) in the index could diminish, according to the strategists.
“Smaller companies will end up representing a larger percentage of the entire index,” said Sam Stovall, chief investment analyst at CFRA Research.
“It will require portfolio managers to add to their positions in these companies, which will push up their share prices.”
Putting on the brakes in the Mega Cup Rally
Apple, which touched $3 trillion in market value late last month, fell 1% Monday after the news. Shares of other major companies, including Microsoft, Alphabet and Amazon, fell between 0.7% and 2.5%.
Changes in the index will force the investment funds that track it to adjust their portfolios and sell stocks of companies with less weight in the index.
A wide range of funds that track the Nasdaq 100 are expected to be affected by the rebalancing, including the popular exchange-traded fund, the $200 billion Invesco QQQ ETF.