A breakdown of the changes to the Nasdaq-100 and what it means for Megacap Tech stocks
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The biggest stocks in the market will soon get taken down a peg or two, at least on paper. Nasdaq announced on July 7 that it would do a special rebalance of the Nasdaq-100 Index to dilute the weightings of the massive tech stocks that have outperformed in 2023, which put funds that closely track the index at risk of running afoul of regulatory rules about diversification. The holdings of the Invesco QQQ Trust , which closely tracks the index, shows that the combined weighting of the seven largest companies had ballooned above 50%. Nasdaq has not made the new weightings available to the general public, but Goldman Sachs provided a breakdown of the notable changes in a Monday note from strategist David Kostin. Here are some of the biggest shifts that the index will see when the rebalance becomes effective on July 24. The seven largest stocks in the Nasdaq-100 will be diluted down to 44% of the index from the current 56%. Nvidia and Microsoft are most affected by the readjustment, each falling about 3 percentage points. Apple will still be the biggest stock in the index, at 11.5%, down from 12.8% previously. Information technology stocks as a group will account for 49% of the index, down from 51% previously. No other sector will see a change of more than 2 percentage points. Broadcom will score the biggest increase in its weighting, to about 3% from about 2.4%. The changes mean that the Invesco QQQ Trust and other funds that closely follow the index will need to sell some of the biggest stocks in the market this week. But it is unclear if the changes will have a major impact on the price of those stocks, given the two-week warning of the rebalance and the fact that many fund managers are already underweight the biggest stocks. A previous special rebalance in 2011 did not have a noticeable impact on market pricing, according to Goldman Sachs. “Nasdaq slashed the NDX weight of AAPL from 20% to 12%, but this change had no clear negative effect on the stock’s performance. Likewise, there was no clear impact on MSFT despite its index weight rising by nearly 5 [percentage points] to 8% following the rebalance. In fact, MSFT lagged AAPL during the weeks around the rebalance,” Kostin wrote in the note to clients, referring to the last special rebalance. The rebalance comes as the increased concentration of large cap tech stocks has raised concerns that the current market rally is unsustainable. “We found that when we looked at relative performance between the S & P 500 and a version of that index which excludes these Mega Tech Favorites, that S & P 500 performance has been stalling around levels that marked the peak in performance in late 2020 and 2021,” RBC Capital Markets strategist Lori Calvasina said in a note to clients on Monday. The shifts could also have an impact on the derivatives market, even if the prices of the underlying stocks are largely unaffected. JPMorgan strategist Bram Kaplan said in a note to clients on Monday that the adjustment could lower the implied volatility for the Nasdaq-100 index while raising its dividend yield. — CNBC’s Michael Bloom contributed to this report.
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