Worried About Nvidia, Apple and Meta? Nasdaq Has Your Back
Everyone can stop all the hand-wringing over the “over-concentration” of the Nasdaq 100: The index provider is doing something about it, as expected, in a sign that the system is working as intended after all.
As Nasdaq announced late last week, it plans to carry out a “special rebalance” on July 24 to redistribute weights after the run-up in mega-cap stocks. Although the out-of-cycle move was rare and blindsided some investors, it should come as little surprise to those familiar with the index’s methodology.
The Nasdaq 100, of course, is a modified market capitalization-weighted index that is rebalanced quarterly (in March, June, September and December) and then reconstituted annually.
- In the quarterly review, the sum of all highly weighted stocks (4.5% and more) may not exceed an aggregate of 48%; if they do, they must be reset back to 40%.
- In the annual adjustment, no security weight may exceed 15%; if so, it must be reset to 14%.
- Also in the annual adjustment, the five largest market capitalizations may not exceed 40%; otherwise, they will be reset to a total of 38.5%.
Although Nasdaq’s initial press release was sparse on the details, it was clear that the index had crossed some of those red lines. Specifically, as of July 6 (the day before the press release), the index was in violation of Nos. 1 and 3, thanks to the extraordinary run-up in shares of Microsoft Corp., Apple Inc., Nvidia Corp., Amazon.com Inc., Meta Platforms Inc., Tesla Inc., and Google parent Alphabet Inc. — the so-called Magnificent Seven, which collectively accounted for about 77% of the broader index’s advance this year. Unsurprisingly, the index creators did what they’ve always said they’d do.