The Nasdaq-100 rebalancing finally comes into effect today after close to a month of anticipation. What does that mean for the “Magnificent Seven” stocks that have dominated the index the past few years?
Well, the rebalancing will see the high-growth index shift the weighting of many of its heaviest holdings, including each of the top seven highest-performing stocks. Indeed, the rebalancing was triggered earlier in July, after companies weighted 4.5% or more collectively surpassed 48% of the total index weight.
This was in no small part due to the success of some of the index’s highest-weighted components — namely Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA), which have more than tripled and doubled respectively this year. In fact, as of July 3, Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Nvidia, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Tesla accounted for more than 50% of the index.
It is worth noting that Nasdaq isn’t adding or removing any stocks from the index. Rather, the rebalancing will see the most heavily weighted companies lose a bit of their weight in order to offer more equitable representation to other companies on the Nasdaq-100.
Nasdaq-100 Rebalancing to Correct Top-Heavy Imbalances
Microsoft and Apple will continue to be the most significant components of the Nasdaq-100, but their weightings will shift from 12.8% and 12.45% to 10.06%, and 9.79%, respectively. These represent the two most-significant percent losses in weight following the rebalancing, with the two making up a little less than half of the nearly 11% total top-end weight reductions.
After Microsoft and Apple, Alphabet and Nvidia come in as the next two most-reduced stocks on the Nasdaq-100, losing 1.57% and 1.49% of their weight, respectively. Meanwhile, Broadcom (NASDAQ:AVGO) will see the greatest increase in index weighting, from 2.4% to 3%.
Even despite the relatively significant changes, the Nasdaq remains undeniably top-heavy. Indeed, the “six most-valuable stocks on the Nasdaq 100 will still account for 40% of the index following the changes.” That’s a notable decline from the 50.9% level recorded on July 3, sure. But it’s still far from an equal playing field with the other stocks in the index.
Some have expressed concerns that the rebalancing may slowdown the Nasdaq’s gains this year. However, historically this hasn’t been the case. After the 1998 rebalancing, the Nasdaq surged more than 110% in the following year. After the 2011 rebalancing, the Nasdaq jumped an additional 9%.
“The 9% gain a year later isn’t so bad,” said analysts from Bespoke Investment Group, per Investor’s Business Daily. “Based on these historical examples, the Nasdaq’s special rebalance doesn’t signal doom or a major reversal for the market; if anything, a continuation of recent trends is the signal sent by limited precedent.”
While the Nasdaq-100 may slow its roll heading into the fourth quarter of the year, given it’s eye-popping 42% climb year-to-date (YTD), any slowdown likely won’t be due to the relatively meager changes of the rebalance. The Nasdaq-100 is up slightly as of this writing, on the first day of trading with the new rebalance in effect.
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.
