The planing that occurred last year within the Nasdaq is about to happen again… because the big American technology companies are too big again. Tesla’s comeback and Broadcom’s surge are forcing the Nasdaq to react.
Index providers are grappling with problems caused by the presence of overly invasive companies… The surge in certain stocks required a “special rebalancing” of the Nasdaq 100 in the summer of 2023. It notably concerned Microsoft, Apple, Nvidia, Amazon and Tesla, which then alone represented 43.8% of the weight of the index. The planing consisted of reducing this weight to 38.5%, in accordance with an old statutory rule of the index.
The problem is that the big names have continued to gain weight. Based on December 17 prices, Apple, Microsoft, Nvidia, Broadcom, Amazon, Tesla, Meta and Alphabet weigh approximately 51.65% of the index (from 8.77% for Apple to 4.99% for Meta) . “Nasdaq methodology paper suggests combined weighting could be reduced to 40%“, estimates Bloomberg in a paper published last night.
Why is the Nasdaq going to be “rebalanced”
A “special rebalancing” of the Nasdaq 100 index is therefore necessary again. This is a tool Nasdaq has to maintain compliance with a U.S. Securities and Exchange Commission rule on fund diversification. It has only been implemented three times in the past, in 1998, in 2011 and therefore in 2023. The special rebalancing can be carried out at any time if the cumulative weight of the companies which individually represent more than 4.5% (8 companies therefore currently) of the index collectively exceeds 48%.
In 2023, the rebalancing was mainly due to the surge of Nvidia and Tesla. It should be noted that at the time, Microsoft (12.9% of the index) and Apple (12.47%) weighed much more. It is the continued rise of Nvidia, the strong recovery of that of Tesla and the advent of Broadcom which partly explain the situation at the end of 2024.
This special rebalancing coincides with the annual rebalancing that the index will implement next Friday evening and with the last arbitrage among its members, which will see Palantir, MicroStrategy and Axon arrive at the expense of Moderna, Illumina and Super Micro Computer.
And the S&P500?
Rebalancing of weights in the S&P 500 occurs when the aggregate of companies, each of which has a weight greater than 4.8%, exceeds 50% of the total index, according to S&P Dow Jones Indices. Apple, Microsoft and Nvidia are the only three companies whose weight exceeds 4.8% in the S&P 500. The five most influential companies in the S&P 500, which also include Amazon and Alphabet, represent 28.5% of the market value total index as of December 17 (based on iShares S&P500 ETF).
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