The big ones have become too big and the little ones risk not making it. This is the reason why the steering committee of the NASDAQ 100, the most important technological index in the world, has decided to launch a small revolution that will bring a “special rebalancing” within the index. In history it has happened only two other times: the first in 1998, the second in 2011. Twenty-two years ago the movement concerned above all Apple which had reached and exceeded a no longer tolerable 20 percent of the index. This time it will involve the so-called Magnificent Seven. In addition to the titles of the Cupertino company in the viewfinder are in fact over Microsoft, Alphabet (Google), Nvidia, Amazon, Tesla and Meta. The reason? Above all, the first six have grown so much that they have exceeded the weight limit set for each share.
Nasdaq, the rebalancing arrives on July 24: here's how it will work
Thanks to the Fed's interest rate hikes and the growing fervor around artificial intelligence, the performance of the 7 big techs since the beginning of the year are monstrous: Microsoft +44,6%, Apple +48,6%, Google +34,7%, Nvidia +211,4%, Amazon +54,7%, Tesla +113,4%, Meta +151,9%. A disproportionate growth that has meant that six of the Magnificent Seven titles have reached the weight limit set by the index for each share.
Let's move from words to percentages. Under the rules, the Nasdaq must be rebalanced when the companies that are in the index weigh in individually most of 4,5% they overcome together the cumulative threshold of 48%. Well, thanks to the rally achieved in the first six months of the year, the weight of six of the seven big tech companies that exceed 4,5% (excluding Meta which is currently at 4,4%, just below the limit) has reached 56% of the index compared to 44% of the other 94 smaller listed companies. So from the close of Friday 21st July to the pre-market on Monday 24th July the music will change and a special rebalancing will take place which will not remove any of the existing stock or add any new ones, it will only help to redistribute their weight to avoid excessive concentration and reduce risks. As a percentage the weight of the large ones will be reduced from 56 to 40% e The 16% difference will be redistributed among the other listed companies.
As established by the steering committee, the rebalancing will be based on the closing prices of the index securities and shares outstanding on July 3, 2023 and the Nasdaq will directly adjust the weightings.
The consequences for the Magnificent Seven
To suffer the greatest scaling will be Microsoft, which weighed 3% of the index on 12,8 July. They follow Apple Lossless Audio CODEC (ALAC), with 12,4% and Google with 7,3%. On the wheel Nvidia (6,9%) and Amazon (6,8%). Tesla closes with 4,5%. Meta, as mentioned, could "save" itself by the skin of its teeth given that as of July 3 its weight on the Nasdaq was 4,4%.
“Based on the average daily volume traded over the last 20 days for these stocks and a regular rebalancing carried out over five trading sessions, the most impacted stock will be Microsoft – writes Peter Garnry, head of equity strategy at BG Saxo -. ETFs will move about 6,67% of the average volume transacted while the least involved will be Tesla with 0,50%".
The first big effect of the rebalancing concerns mutual funds and ETFs that they will be forced to sell part of their shares of the 7 Big Tech, increasing their positions on the remaining stocks of the index. In circulation there are 24 that replicate the Nasdaq 100, whose value is 271 billions of dollars. How do you explain The Sun 24 hours, "until today, whether you like it or not, anyone who invested 1.000 euros in a Nasdaq-replicating ETF financed just five companies for around 500 euros". From July 24, the loan will drop to 400 euros, while the remaining 600 will go to smaller stocks listed in the technology index. According to Goldman Sachs, the direct trackers will benefit above all, i.e. the immediately following shares in the index, such as Broadcom, PepsiCo, CostCo, Adobe, Cisco and Netflix who will be able to count on the main incoming flows.
