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Nasdaq 100 Initiates Strategic Rebalance to Foster Greater Diversity and Reduce ‘Magnificent Seven’ Dominance

July 12, 2023
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The Nasdaq 100 index, a modified market-capitalization index, is set to undergo some changes in its composition and weightings. Currently, the seven largest companies in the index account for 55% of its total value. However, there are plans to reduce this combined weighting to promote greater diversification. This adjustment is expected to result in notable shifts in the relative weightings of these seven giants.

As of July 7, Microsoft holds the largest weight in the index at 12.9%, followed closely by Apple at 12.5%. Despite Microsoft’s market capitalization being lower than Apple’s, its higher weighting reflects the methodology’s consideration of factors beyond market valuation alone. Google, represented by both the GOOGL and GOOG share classes, carries a 7.4% weighting. Nvidia, with its significant market cap of $1.05 trillion, holds a 7% weighting, slightly surpassing Amazon’s 6.9% weighting, despite Amazon having a higher valuation of $1.33 trillion. Tesla and Meta Platforms complete the top-seven members with weights of 4.5% and 4.3% respectively.

It is worth noting that for the entire Nasdaq composite, Apple had an 11.4% weighting, while Microsoft accounted for 9.5% as of July 7. Other notable weightings include Google at 5.8%, Amazon and Nvidia at 5.1% and 4% respectively, Tesla at 3.3%, and Meta Platforms at 2.8%.

Moving forward, the combined weight of the five companies with the largest market caps will be reduced to 38.5% based on Nasdaq 100 methodology. Previously, these five companies—Apple, Microsoft, Google, Amazon, and Nvidia—held a combined weight of 46.7%, indicating a significant reduction for them. Additionally, no component outside the top-five market cap companies can have a weighting exceeding the lesser of 4.4% or the weight of the stock with the fifth-largest market valuation. This implies that TSLA stock’s weight may experience a slight decline.

The official reweightings are expected to be released on Friday. It is anticipated that the changes will result in increased weightings for certain stocks. According to Wells Fargo analysts, Starbucks, Mondelez International, Booking Holdings, Gilead Sciences, Intuitive Surgical, Analog Devices, and Automatic Data Processing will be among the beneficiaries of the special rebalance.

In terms of performance, the Invesco QQQ ETF, which tracks the big-cap Nasdaq index, has seen a substantial increase of 37.5% in 2023 through July 7. In contrast, the First Trust Nasdaq 100 Equal Weighted Index ETF, which gives equal weight to all 100 stocks, has only risen by 18.8%. This significant discrepancy in performance is largely attributed to the extraordinary growth of the megacap stocks. For instance, NVDA stock has nearly tripled (191%), META stock has soared 141%, TSLA stock is up 123%, AMZN stock has leapt 54.5%, AAPL stock has risen 47%, MSFT stock has grown by almost 41%, and Google stock has jumped by a robust 35%.

Concerns have been raised about these few dominant names potentially distorting the overall health of the stock market, prompting the need for the special rebalancing.

The special rebalancing of the Nasdaq 100 will lead to shifts in stock allocations among ETFs and mutual funds that track the index. While there might be some one-off gains or losses as the planned changes are announced on July 14, the overall impact is expected to be modest.



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