A "special rebalance" is coming to the Nasdaq 100 and related ETFs. But right now, only the six largest stocks will be most affected.
Apple, Microsoft, Alphabet, Amazon.com, Nvidia and Tesla are the six Nasdaq 100 stocks soaring so much they're tripped up by the index's rules. These stocks now individually account for 4.5% or more and at least 48% collectively of the market value of all the stocks in the Nasdaq.
Just these six stocks account for roughly 56% of the Nasdaq 100's total market value. This violates the Nasdaq 100's rules. When so many stocks gain this much heft, that triggers a "special rebalance" to limit their weight in the index. It's rare. It's only happened twice before, in 1998 and 2011, says Cameron Lilja, vice president and global head of index products and operations at Nasdaq.
"The special rebalance is part of the Nasdaq 100 methodology and ensures that index-tracking funds maintain compliance with fund diversification rules," Lilja said.
Finding The Most Affected Nasdaq 100 Stocks
The special rebalance attempts to put runaway Nasdaq 100 stocks in their place.
All the Nasdaq 100 stocks accounting for 4.5% or more of the index's value will be recalibrated so they are only 40% collectively (vs. the roughly 56% now), using closing prices from July 3. This means Meta Platforms, often included in the "Magnificent Seven," just missed the cutoff. It only accounted for 4% of the Nasdaq 100's value on July 3.
Arguably the two tech giants, Apple and Microsoft, will be most affected. With their combined market value of north of $5.4 trillion, Apple accounts for roughly 16% of the Nasdaq 100's value and Microsoft 14%.
The Nasdaq is expected to implement the special rebalance prior to the market open on July 24. But investors with $202 billion riding on the popular Invesco QQQ Trust ETF are already wondering how this unusual change will affect them.
Nasdaq 100's Changes On ETFs
The changes are a slight negative for the Nasdaq 100 giants. ETFs tracking the index will likely need to sell to lower the weights.
"Some of the megacap stocks have and could sell off in expectation of the reduced weightings," said Todd Rosenbluth, director of research at VettaFi.
Even so, the changes are beneficial to Nasdaq 100 ETF investors. They lower stock-specific risk. "The indexing efforts will provide helpful risk-reduction efforts to shareholders," he said.
"The rebalance can protect investors from themselves. One of the benefits of investing in (Nasdaq 100) ETFs is diversification," he said. "Rather than owning Apple, Amazon.com or Alphabet directly, advisors can use these ETFs to spread the risk around and get exposure to companies in different sectors."
Ways To Deal With The Change
ETF investors already have tools to prevent overconcentration. For one, the Invesco QQQ Trust will adjust itself to closely track the new Nasdaq 100.
Additionally, there's the Invesco Nasdaq 100 ETF, which will also reflect the index's changes. Additionally, the fund caps any individual stock to 24%. It also only charges 0.15% annually, a slight discount to the 0.2% the QQQ charges.
Another option is the Direxion NASDAQ-100 Equal Weighted ETF. It charges 0.35%, but weights all of the stocks in the index equally.
"Investors that want Nasdaq 100 exposure without the concentration risk can look to the QQQE, which has 1% exposure to Apple (and) Microsoft but also much smaller companies that are part of the growth index," Rosenbluth said.
Most Valuable Companies In Nasdaq 100
| Company | Ticker | Market value (in trillions) | % of Nasdaq 100 |
|---|---|---|---|
| Apple | $3.0 | 16.5% | |
| Microsoft | 2.5 | 13.7 | |
| Alphabet | 1.5 | 8.3 | |
| Amazon.com | 1.3 | 7.3 | |
| Nvidia | 1.0 | 5.7 | |
| Tesla | 0.9 | 4.8 | |
| Meta Platforms | 0.7 | 4.0 |
Sources: S&P Global Market Intelligence, IBD based on estimated July 3 values
Follow Matt Krantz on Twitter @mattkrantz
