Index rebalancing on July 24th
What the Nasdaq adjustment means for tech stocks
By Stefan Schaaf
7/17/2023 7:26 am
In a week, the important Nasdaq 100 index will be rebalanced. Due to the price rally at Apple and Microsoft & Co., the big tech stocks have become overpowering. The adjustment is intended to fix the “overconcentration in the index”. A German DAX group is also among the beneficiaries.
The essence of the capital market is that it is always good for surprises. After all, strong price movements usually result from unexpected turns, because in a time of fast-flowing information, what can be expected is usually included in the prices very quickly. The strong price increase in technology stocks this year was not to be expected. The Nasdaq 100 index, which is considered the premier tech stock index (although it also includes numerous non-tech stocks like PepsiCo and Starbucks), is up nearly 40 percent so far this year. That was his best first half year ever and even better than during the internet bubble at the turn of the millennium.
But now the share category, which has been used to success, is threatened with restless days and weeks, which for once has nothing to do with the economy, interest rates or inflation. In a way, tech stocks may be falling victim to their own success. The stock exchange operator Nasdaq has announced an unscheduled adjustment of the weighting in the index for July 24th. The reason for this is that the six largest stocks in the Nasdaq 100 now have a weight of more than 50 percent. This means that anyone who buys an index fund on the Nasdaq 100 diversifies less and less and instead puts their money on a handful of tech giants.
Diversification Rules
The special rebalancing, the first of its kind, is designed to prevent index-linked or index-linked fund managers from violating an SEC diversification rule. Cameron Lilja, vice president and global head of indexes, told Bloomberg news agency that the aggregate weighting of the largest stock holdings — those that account for 5 percent or more — is capped at 50 percent.
Not only do the shares of Apple, Microsoft, Alphabet (A and B shares), Amazon and Nvidia each account for more than five percent of the Nasdaq100, they dominate it with a share of almost 60 percent. Apple and Microsoft alone dominate the index by almost 30 percent.
The rebalancing will take effect on July 24 and, according to the index operator, is aimed at “resolving excessive concentration in the index through a rebalancing of weights”. The special rebalancing is nominal only – no new securities are added or removed.
One thing is clear: the weight of the tech giants will be limited and, conversely, smaller stocks will become more important in the Nasdaq 100. This will lead to shifts in investors who follow the index or in exchange-traded funds (ETFs). They will shift their holdings in Apple, Microsoft & Co. in favor of previously low-weighted stocks. This can lead to strong price movements in the coming days and weeks, especially because the modalities of the extraordinary adjustment are not yet known.
Small values benefit
Although two stocks are below the five percent mark, they already have a high share of a good four percent. These are the Facebook mother Meta and Tesla. This is followed by a field of significantly lower weighted stocks that could benefit greatly from the rebalancing. These include Adobe, Cisco and Netflix.
Deutsche Telekom shares could also indirectly be among the winners of the rebalancing. The reason for this is that the listed US subsidiary of the Bonn-based group, T-Mobile US, ranks 20th on the Nasdaq 100 with a share of just under one percent. If the demand for the shares and thus their price increases, then the value of the US subsidiary in the Telekom balance sheet also increases. According to Refinitiv data, the German group holds 50.43 percent of the US mobile communications provider.