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 / 07

  • 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
  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article
  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article
Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.