What is the investment impact from the Nasdaq 100 special rebalance? What is the investment impact from the Nasdaq 100 special rebalance? What is the investment impact from the Nasdaq 100 special rebalance?

What is the investment impact from the Nasdaq 100 special rebalance?

Equities 4 minutes to read
Ken Shih v2
Ken Shih

Saxo’s Head of Wealth Management Greater China

Summary:  US tech stocks are up +31% in 2023 but concentration at the top is very high. The top 10 stocks now take up 61% of the Nasdaq index. A 'special rebalance' is coming for the Nasdaq but the impact will be quite minimal.

20230713 10 largest US tech stocks historically
Source: Bloomberg

In the past 23 years the US tech stock index (Nasdaq 100) has NEVER had a concentration of its top 10 stocks exceed 60% of the market capitalization of the index.  It is currently 61% and dominated by the major US tech giants. "Market capitalization" is the measure of a company's size using the value of all its outstanding shares of stock.

Fun fact: the 7 major tech giant stocks drove up 77% of 2023 returns. But a ' special rebalance' is coming for the Nasdaq. Two insights:

1) What is a 'special rebalance' and when will it happen?

The US stock exchange Nasdaq will implement a 'special rebalance' to address overconcentration in the top five securities Microsoft, Apple, Nvidia, Amazon, and Tesla. Typically rebalancing can happen yearly, quarterly or in special circumstances. For example, if the 5 largest stocks in the index with individual weights exceeding 4.5% have a combined weight ABOVE 40%, then 5 largest stocks will be brought down to a combined weight to 40%.

Currently the top 5 stocks Microsoft, Apple, Alphabet, Nvidia and Amazon have a combined weighting of 46%. The special rebalance will be effective before the market open on the 24 July 2023.

2) What is the investment impact from the special rebalance?

The market reaction overnight where the US tech giants dropped 1-2% on the news is a bit silly. Why? Because the rebalancing impact will likely be indirect and minimal.

Some people may point out the so-called FORCED selling by passive Exchange Traded Funds (ETFs) tracking the Nasdaq-100 index could MOVE the market as a result of this rebalance. Assuming the top 5 securities will be limited to 40% index weight, this will lead to an estimated US$9.6 billion in rebalancing value among the 24 ETFs tracking the Nasdaq-100 Index. But based on the average 20-day average daily traded value of say Microsoft and Tesla this rebalancing value will only take up 6.7% and 0.5% in shares, so the impact will be quite minimal and unlikely to drive down the stock pricing of the tech giants from the rebalancing alone.

Important to point out although this reduces concentration slightly on the index level, this does not reduce the current elevated valuations of the US tech giants…

What's your view on US tech stocks ahead?


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