Nasdaq 100 Index Slated for Unusual Change
The fifth-largest exchange-traded fund will be impacted.
The index underlying the fifth-largest exchange-traded fund in the U.S. will see an unusual change in the coming weeks.
On Friday, the Nasdaq announced that the Nasdaq-100 Index would undergo a “special rebalance” at the market open on Monday, July 24.
The Nasdaq-100 is the index behind the $202 billion Invesco QQQ Trust (QQQ), as well as eight other U.S.-listed ETFs.
According to the Nasdaq’s press release, a special rebalance is conducted “to address overconcentration in the index by redistributing the weights.”
Currently, the top five stocks in the Nasdaq-100 (Microsoft, Apple, Nvidia, Amazon and Tesla) make up 43.1% of the index (or 45.9% if you swap Tesla for a combination of Alphabet’s two share classes).
But according to the Nasdaq Index Weight Adjustment Guidelines, if the top five stocks make up more than 40% of the index, their aggregate weighting is adjusted downward to 38.5% in an annual weight adjustment process.
The Nasdaq’s announcement of a special rebalance suggests the firm wants to make the adjustments earlier than it normally would so funds that track the index don’t run afoul of the SEC’s diversification requirements.
The constraints are in place to “ensure that any funds that are tracking the Nasdaq 100 remain in compliance with the Regulated Investment Company diversification rule,” Cameron Lilja, vice president and global head of index product and operations at Nasdaq, told Bloomberg.
Outsized Weightings
Even after the special rebalance, the Nasdaq-100’s top stocks will maintain outsized weightings in the index. And if those stocks keep rallying, the Nasdaq may need to act again.
In addition to constraints on the aggregate weighting for the top five stocks in the index, the index’s guidelines constrain how much sway any individual stock can have in the index.
Currently, Microsoft and Apple make up around 12.5% of the Nasdaq-100, but the guidelines state that if an individual stock’s weighting exceeds 15%, it will be adjusted downward to 14% in the annual weight adjustment process.
Additionally, no stocks outside of the top five can maintain a weighting of more than 4.4% of the index. Today the sixth-largest member of the index, Meta Platforms, has a 4.35% weighting in the index.
Modest Impact
From the perspective of an investor in Nasdaq-100-tracking ETFs like QQQ, the special rebalance of the index won’t have a huge impact. If the five largest stocks in the Nasdaq continue to outperform the rest of the index, then having a smaller allocation to those names will certainly be a drag.
But the aggregate weighting of those stocks should only decline by around 5% to 7.5%, and they will still make up a huge chunk of the ETF’s portfolio.
And if you’re an investor who wants even more concentrated exposure to the five largest Nasdaq-listed stocks, it might make sense to just purchase the stocks individually.
Contact Sumit Roy @[email protected]
