Apple. Microsoft, and the rest of big tech have gotten too big for the Nasdaq 100 -- and the index provider has a solution to the problem. Unfortunately, that solution is a problem for the market's Big Seven.
One wrinkle to this year's dramatic rally in technology shares has been the huge role played by the market's most valued tech companies by market cap. That's created a particular problem for the Nasdaq 100 stock index, which tracks the 100 largest companies that trade on Nasdaq.
As a solution, Nasdaq has announced plans for a "special rebalance" of the weightings on the Nasdaq 100 later this month to address "overconcentration" in the index. That's no minor development: According to Nasdaq, there was more than $300 billion in exchange-traded funds tracking the index as of the end of 2021, and the total now is no doubt considerably higher. The Invesco QQQ ETF $(QQQ)$, which tracks the Nasdaq 100, alone has over $200 billion in assets. In effect, indexers will need to sell some of their holdings in the largest constituents of the index, and add to their positions in other stocks.
The Nasdaq 100 is up 37% this year, aided by huge gains in the stocks which 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 Tesla (4.5%.)
Nasdaq's stated methodology says that "a special rebalance may be conducted at any time...if it is determined to be necessary to maintain the integrity of the index."
Nasdaq has conducted a special rebalance only twice before -- in December 1998 and May 2011. Nasdaq's rules state that if all stocks with a weighting of more than 4.5% in the index exceed 48%, then Nasdaq rebalances the indicator. Under Nasdaq rules, the rebalancing process sets the aggregate weight of stocks with a weighting of 4.5% or more at 40%.
Given the sharp rally in the six stocks that were at or above the 4.5% level as of the last rebalancing, it seems likely that all six will have their weighting adjusted as a result. For the year to date, Apple is up 45%, Microsoft has rallied 38%, Alphabet is up 32%, Amazon, 51%, Nvidia, 188%, and Tesla, 118%.
The special rebalance will be based on index and stock prices as of July 3. Details will be announced on July 14, and will go effective on July 24.
Shares of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Nvidia (NVDA) and Tesla (TSLA) are all down between 0.8% and 2.7% on Monday; Meta is up, getting some support from investor enthusiasm for the recent rollout of Threads, a new social network that is competing with Twitter.
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