The changes of a “special rebalance” of the Nasdaq 100 are set to be announced on July 14 as part of an effort to reduce the dominance of the index’s seven most major tech stocks, referred to as the “Magnificent Seven.” Indeed, some of the index’s most elite tech companies are set to have their weight significantly reduced as part of an effort to mitigate the over-concentration of some companies in the index.
So, which companies are going to be affected?
Well, as it stands, seven tech giants — Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Nvidia (NASDAQ:NVDA), Tesla (NASDAQ:TSLA) and Meta Platforms (NASDAQ:META) — make up more than 48% of the index collectively.
Apparently, one of the methodologies of Nasdaq is to rebalance the index when a group of large stocks, each of which makes up more than 4.5% of the index, surpasses 48% of the total index weight. Following the rebalancing, the top companies will be limited to 40% of the total index weight.
Fortunately, this doesn’t imply the removal of any funds found on the popular growth-centric index. Per Nasdaq:
“As described in the published index methodology, a Special Rebalance may be conducted to address overconcentration in the index by redistributing the weights. The Special Rebalance will not result in the removal or addition of any securities.”
The Nasdaq 100 represents the basis for some of the most heavily traded exchange-traded funds (ETF) in the U.S., including the Invesco QQQ Trust (NASDAQ:QQQ). QQQ is arguably the second-most-popular ETF after the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), which tracks the S&P 500.
Tech Stocks Climb Ahead of Nasdaq Rebalancing
It’s certainly an interesting year for the Nasdaq to change up its weighting. Indeed, the Nasdaq 100 is up a whopping 40% this year as part of a tech and artificial intelligence (AI) fueled rally. That said, there’s little doubt that the index is skewed toward a small handful 0f companies that have enjoyed enormous success in 2023.
“There is some concern that this handful of names is distorting the health of the overall stock market, which is likely what’s spurring the special rebalancing,” Art Hogan, Chief Market Strategist at B Riley Wealth, told Reuters.
On July 14, the changes to the index will be announced. Next, the changes will take effect on July 24, although “the adjustment will be based on shares outstanding as of July 3.”
As it stands, Microsoft is the single largest-weighted company in the index, coming in at 12.91%. That is followed closely by Apple at 12.47%, Nvidia at 7.04% and Amazon at 6.89%.
This is just the third special rebalancing in the index’s relatively long history, with prior rebalances having taken place in 2011 and 1998.
A number of major tech stocks actually fell when the Nasdaq announced the changes to be. This includes the likes of Microsoft, Alphabet and Amazon, which each “fell between 0.7% and 2.5%” on Monday, the day of the announcement.
That drop was in no small part due to their expected diminished weighting in the near future. Meanwhile, companies like Starbucks (NASDAQ:SBUX), Mondelez (NASDAQ:MDLZ), Gilead Sciences (NASDAQ:GILD) and Intuitive Surgical (NASDAQ:ISRG) are expected to see their weights increase in the Nasdaq 100.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
