SUMMARY
- Nasdaq announces an unusual special rebalance of the Nasdaq 100 Index, set to take place on July 24.
- The adjustment is a response to significant growth in the biggest tech stocks, which has led to overconcentration in the index.
- This is the third special rebalance in Nasdaq's history, a move designed to ensure compliance with fund diversification rules.
We are currently observing an extraordinary narrative in the financial world. This year, an astonishing growth has been seen in a select few tech stocks, the giants in the industry. This growth spurt has set in motion a series of unusual adaptations to Nasdaq's widely followed growth index.
On July 7th, Nasdaq declared a unique recalibration of the Nasdaq 100 Index. This modification is expected to be put into action before the stock market's opening bell rings on July 24th.
This special recalibration acts as an antidote to the concentration of the index by reassigning the weightings. While this index usually undergoes a rebalance on a quarterly basis, Nasdaq makes an effort to restrict the combined weighting of the five leading stocks to below 40%. This restriction is enforced during an annual adjustment.
However, the five front-runners seem to have crossed this limit, based on the holdings of the Invesco QQQ ETF, a financial instrument that follows the index. The combined weightage of just the top three players — Microsoft, Apple, and Nvidia — is over 30%, due to Nvidia's stock price nearly tripling this year. The top 10 holdings make up almost 59% of the total weight.
This unusual occurrence marks the third time a special rebalance has been called for on record for the Nasdaq 100. The new weightings will be unveiled by the company on July 14th. As Cameron Lilja, the global head of index product and operations at Nasdaq, clarified, the special rebalance is part of the Nasdaq-100 methodology. It ensures that index-tracking funds adhere to fund diversification rules. The previous instances of such a rebalance were in 2011 and 1998.
The Nasdaq 100 Index, a reflection of the 100 largest non-financial entities traded on the exchange, is often viewed as a representative of growth stocks. It has witnessed an exceptional surge of around 37% year to date, towering over the S&P 500 and the Dow Jones Industrial Average.
Several index funds follow the Nasdaq 100, including the QQQ, which boasts a substantial $200 billion in assets under management.
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