To The Moon

Nasdaq 100 Rebalancing Purpose?

On 7 Jul 2023, Nasdaq announced that its 100 Index will be undergoing a “Special Rebalance”.

More details will be out tomorrow, 14 Jul 2023.

Changes will be effected on Mon, 24 Jul 2023 before US market opens for trading.

Rebalance exercise is meant to address “overconcentration in the index” following major gains of the “Big 7” Mega Cap tech stocks.

No reason to believe (for now) that new stock will be added to the list, or existing ones removed from it.

When Did Last Rebalance Take Place?

Nasdaq has conducted a special rebalance twice:

• Dec 1998.

• May 2011.

Criteria For Rebalancing:

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%.

Nasdaq 100 - Top 20 Stocks & Weightage:

Nasdaq 100 by Weightage - #1 to #10

Nasdaq 100 by Weightage - #11 to #20

As could be seen:

• $Microsoft(MSFT)$ is #1 rank with 12.699% of the index.

• $Apple(AAPL)$ is #2 rank with 12.332% of the index.

• Nvidia is #3 rank with 6.986% of the index.

• and so on & so forth..

The Mega Cap stocks have surged this year (2023) as investors bought up shares of companies with exposure to artificial intelligence (AI).

Upon rebalancing, Indexers will have to:

• Sell some of their holdings in the largest-Cap stocks

• Add to their positions in smaller-Cap stocks.

As was on Tue, 11 Jul 2023, 4 days after announcement, Mega Cap stocks fell:

• Apple: down -0.3%.

• Microsoft: down -1.0%.

• Tesla: down -0.2%.

How I See This Exercise:

I think the 7 Mega Cap stocks (see below) prices may dip on 24 Jul 2023.

Will this present a “buying” opportunity? Have to be acutely alert and vigilant on that day.

Conversely, there will be 7 or more smaller Cap stocks that would be the beneficiary of this rebalance exercise.

7 Stocks “In Jeopardy” (Maybe):

When presented in a Pie Chart, it is easy to see the “risks” with 7 stocks taking up easily 50% of the Index. Flighty - don’t you agree?

3 Stocks I Think, Might Benefit From The Rebalance:

(1) $Broadcom(AVGO)$

• The semiconductor company is one of the leading suppliers of chips & software for various applications, such as (a) data center, (b) cloud computing, (c) wireless communications and (d) industrial automation.

• Having just secured EU antitrust approval for its $61 Billion proposed acquisition of cloud computing firm VMware; just made this stock more compelling & attractive.

• Broadcom has been growing its revenue and earnings steadily.

• It has a diversified & stable customer base across various sectors.

• Pays a generous dividend and regularly repurchases its shares to return capital to its shareholders.

• With a current weight of 2.454%, after the rebalance exercise its could easily increase to approx. 2.65%?

(2) $T-Mobile US(TMUS)$

• The wireless carrier is one of the largest providers of mobile services in the US, with >100 Million customers.

• It has been gaining market share and improving its network quality, especially after merging with Sprint in 2020.

• It has think “out of the box”, launching innovative products & services, Eg. (a) 5G telephony services, (b) TVision and (c) Scam Shield.

• Its current Nasdaq 100-weight is 1.113%. After the exercise, it could increase to possibly 1.3%.

(3) $Netflix(NFLX)$

• The streaming service is one of the dominant players in online entertainment industry, with >200 Million subscribers worldwide.

• It has invested heavily in (a) original content production & (b) acquisition, as well as (c) expanding its global reach and (d) diversifying its revenue streams.

• It has also been (i) generating positive free cash flow (FCF) and (ii) reducing its debt load, that ultimately improves its financial position and Wall Street is happy with.

• Most importantly, Netflix ability to “crack” code sharing issue while retaining & expanding its customer base was a “big plus” to Wall Street.

• With a current weight of 1.317% and its “positive” outlook, after rebalancing, it might increase to 1.55%?

**Note : abovementioned stocks are mine and solely my point-of-view. Readers’ discretion advised.

• Do you think the above 3 stocks will benefit from the rebalance exercise?

• Or do you think its other stocks? Share the stocks you think will rise?

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