Six members —Apple, Alphabet, Microsoft, Amazon, Tesla, Nvidia — have exceeded a preset threshold
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Published Jul 10, 2023 • Last updated 1 day ago • 3 minute read
Apple is among the companies Nasdaq is reweighting on the index. Photo by David Gray/Bloomberg America’s biggest tech companies have become too large even for the stock index tracking America’s biggest tech companies.
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Article content The seemingly unstoppable growth of megacaps like Apple Inc. and Microsoft Corp. mean they have breached an upper limit imposed on stocks in the Nasdaq 100. As a result, Nasdaq Inc. has announced a “special rebalance” will be carried out to redistribute the members.
The index provider says the July 24 adjustment will “address overconcentration in the index by redistributing the weights,” according to a statement from the firm on July 7, with more details due later this week.
Nasdaq’s extraordinary action is a result of the relentless rally that has accounted for almost all the broader market’s gains in 2023. Fuelled by optimism over artificial intelligence, the supercharged performance has sparked a heated debate on Wall Street about whether this top-heavy advance can last.
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Article content It’s “a good thing as it reduces the concentration risk from those players,” said Todd Sohn, managing director of ETF and technical strategy at Strategas Securities. “On the other hand, it increases the burden for the rest of the index — what I like to call ‘the bench’ — to continue to improve and strengthen.”
While details on the action are sparse, a paper on the Nasdaq website says special rebalancings can be called in certain circumstances when the portion represented by the index’s biggest members exceeds a preset threshold. In one scenario, the document says, weights can be pared back if the combined influence of the largest companies — those making up 4.5 per cent or more of the gauge — adds up to more than 48 per cent.
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Article content Data compiled by Bloomberg show that was the case on July 3, when six companies — Microsoft, Apple, Alphabet Inc., Nvidia Corp., Amazon.com Inc., and Tesla Inc. — saw their combined weight reach 50.9 per cent. The Nasdaq methodology paper says a rebalancing may be enacted to reduce the group’s influence to 40 per cent.
All the stocks in that group fell July 10, with shares of Microsoft and Amazon dropping more than two per cent. The traditional version of the Nasdaq 100 was little changed as of 2:30 p.m. in New York. By contrast, the one that strips out market cap bias climbed 1.7 per cent, a drastic reversal from the previous six months, when it trailed by 18 percentage points.
“Megacap tech is underperforming today on the rebalance announcement,” said Alon Rosin, Oppenheimer & Co.’s head of institutional equity derivatives. “They all got hammered relatively as we are seeing money rotations elsewhere.”
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Article content AI investing craze bypasses Canadian stock indexes, for now Where to look to buy outside of the pricey tech megacaps Stock investors are on notice after Wall Street’s fear gauge jumps While the biggest firms will have their sway trimmed, and index-tracking funds such as Invesco QQQ Trust (ticker QQQ) will need to tweak holdings, the reshuffling is unlikely to by itself cause profound changes to the Nasdaq’s performance going forward. Apple, Microsoft and Amazon will still have commanding presences in the gauge befitting their 13-digit market values, with weightings similar to where they stood at various times in the past year.
“Ideally the back half of the QQQ would see their influence increase,” said Sohn at Strategas. “But I don’t imagine it will be anything major outside of a day or two.”
— With assistance from Sam Potter
Bloomberg.com
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