Nasdaq 100 Rebalance: How it impacts mega-cap tech shares and your portfolio?

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Nasdaq 100 rebalancing

The benchmark technology index which hosts the top 100 most valued stocks in the US is set to rebalance its portfolio in order to reduce the influence top technology shares like Apple, Amazon, Google, Netflix, Nvidia and Microsoft have on the index. 

The rebalance, according to Nasdaq, will take place on Jul 24, 2023. 

The ‘Magnificent 7’ stocks - which include the top seven most valued stocks in the index, or the erstwhile connotation of top tech stocks - FAANG, together account nearly half of the entire index’s value. 

According to a report from Reuters, Microsoft, Apple, Nvidia, and Tesla combined account for 43.8% weight in the index, according to Refinitiv data as of Monday's close. As part of the rebalance that will come down to 38.5%.

Nasdaq 100 rebalance: What is the special rebalance?

In order to curb the heavy influence these select few stocks have on the index, Nasdaq has decided to conduct a special rebalance, something it has done only twice since its inception in 1985 - once in 1998 and the other in 2011.

The Nasdaq or the index operator can conduct a special rebalancing at any time if the aggregate weight of companies, each having more than 4.5% weight in the index, tops 48%, according to Nasdaq. During the rebalancing, it is capped at 40%.

Microsoft has the largest weight at 12.91%, followed by Apple at 12.47%, Nvidia 7.04%, Amazon 6.89% and Tesla 4.50%, according to Refinitiv data.

Nasdaq rebalance: How it impacts mega-cap technology shares?

When it comes to benchmark indexes, a lot of institutional investors like hedge funds, asset management companies, family business investment houses directly invest their capital on the index level instead of picking individual stocks. 

Now when an index is rebalanced, as explained above the weightage top firms hold in the index drops. When institutional investors invest money through indexes, the index distributes the investment across the companies in the index based on the weightage. 

Apple, which recently hit a market capitalization of $3 trillion towards the end of the previous month, ended the week of July 14 largely flat following the rebalance announcement. 

Modifications made to the index will require investment funds that mirror it to make adjustments to their portfolios and sell shares of companies that have been reduced in weight within the index.

Numerous funds that replicate the Nasdaq 100, the most famous one being the $200 billion Invesco QQQ ETF (QQQ), are expected to be affected by the rebalancing process.

Nasdaq Rebalance: Who will benefit?

As the mega-cap names in the index stand to lose some weightage, it might also lead to positive opportunities for the small sized companies in the index as the rebalancing of the Nasdaq 100 will lead index investors might have to sell some of their holdings in the largest-cap stocks. 

ARK Innovation might benefit from the rebalance. The ETF is mostly made up of smaller, unprofitable tech stocks, including Coinbase and Roku.  The only two stocks in ARK Innovation that are a part of the big seven megacap names are Tesla which holds the most weight in the ETF and Meta Platforms. 

ARK Innovation gained 12% during the week ended July 14, 2023. 

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.