Nasdaq 100 is set for special rebalance to reduce overconcentration Nasdaq 100 is set for special rebalance to reduce overconcentration Nasdaq 100 is set for special rebalance to reduce overconcentration

Nasdaq 100 is set for special rebalance to reduce overconcentration

Equities 4 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  The Nasdaq-100 Index is set for a special rebalance effective before the open on the 24 July 2023 in order to address the overconcentration by the five largest securities in the index. The special rebalance will trigger around $9.6bn in rebalancing traded value by the 24 ETFs listed in the US and Europe tracking the Nasdaq-100 Index. The underlying equity valuation of these securities is not impacted by the special rebalance and the rebalancing should in theory not have a significant price impact based on our estimates.


Key points in this equity note:

  • The US stock exchange Nasdaq will implement a special rebalance of its Nasdaq-100 Index to address overconcentration in the top five securities Microsoft, Apple, Nvidia, Amazon, and Tesla. The special rebalance will be effective before the open on the 24 July 2023.

  • There are 24 ETFs tracking the Nasdaq-100 Index with a combined AUM of $271bn. Assuming the combined index weight in the five largest securities is reduced to 40% this will cause a rebalancing of $9.6bn in those ETFs.

  • Based on benchmark models for transaction cost analysis, the price impact should theoretically be small with the least price impact expected in Tesla shares and the largest impact in Microsoft shares.

A special rebalance to address overconcentration

On Friday, the US stock exchange Nasdaq announced that the Nasdaq-100 Index will undergo a special rebalance effective prior to the market open on Monday the 24 July 2023. The aim is to address overconcentration in the index by redistributing the weights and the special rebalancing will not result in removal or addition of any securities. Nasdaq refers to the methodology paper of the Nasdaq-100 Index for its decision. It says clearly on page 4 that in the event that the five largest securities in the index, with individual weights exceeding 4.5%, have a combined weight above 40% the five largest stocks will be brought down to a combined weight to 40% in the quarterly weight adjustment. In the annual weight adjustment the combined weight would be set to 38.5%.

The special rebalance will be based on shares outstanding as of 3 July 2023 and the index share announcement and pro-forma file release of the weight changes will take place on Friday the 14 July 2023 allowing market participants five trading sessions to meet the new target weights.

Rebalancing should not theoretically not have an impact

As with stock splits and dividends these events do not change the underlying equity valuation of the securities and thus new stories yesterday suggesting the top five technology stocks in the Nasdaq-100 Index were down due to the announcement is a bit silly. Given the underlying value has not changed any front-selling of shares in advance of the special rebalance should theoretically be met by bids as the underlying value has not changed. Despite this obvious fact one could still make the case that forced selling by passive ETFs tracking the Nasdaq-100 Index could move the market.

The table below shows the 8 largest securities in the Nasdaq-100 Index as of 3 July 2023 with the top five securities being Microsoft, Apple, Nvidia, Amazon, and Tesla. These five securities had a combined index weight of 43.55% on 3 July 2023 and thus were in violation with the index methodology at the time of the quarterly rebalancing.

The combined asset under management in ETFs listed in the US and Western Europe tracking the Nasdaq-100 Index is $271bn with the Invesco QQQ Trust Series 1 ETF (QQQ:xnas) being the largest fund with $202bn in assets. As the table below shows the new target weights, assuming the top five securities will be limited to 40% index weight, will lead to estimated $9.6bn in rebalancing value among the 24 ETFs tracking the Nasdaq-100 Index. Based on the past 20-day average daily traded value and a smooth rebalancing over five trading session the volume participation from these ETFs is expected to be maximum 6.67% in Microsoft shares and minimum 0.5% in Tesla shares.

Using the benchmark model for estimating transaction costs we can see that rebalancing Microsoft shares over five trading days would cost the Invesco QQQ Trust Series 1 ETF, the largest ETF tracking Nasdaq-100, approximately 33 basis points in trade costs and multiplying by the index weight the cost would be around 3.5 basis points for this ETF. Rebalancing Amazon and Tesla shares will be no problem for these ETFs. Overall, we estimate low impact from the special rebalance.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.