Nasdaq 100 Plans Special Rebalance To Curb Dominance Of 'Magnificent Seven'
The Nasdaq 100 index is set to adjust the weighting of its 100 components, with the "magnificent seven" stocks Microsoft (MSFT), Apple, Nvidia (NVDA), Tesla (TSLA), Google parent Alphabet (GOOGL), Meta Platforms (META) and Amazon.com (AMZN) currently accounting for more than half the index's weight.
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The magnificent seven stocks largely fell Monday.
The Nasdaq 100 special rebalance will take place before the market open on Monday, July 24, to "address overconcentration in the index by redistributing the weights."
The weighting changes will be announced on Friday, July 14. No stocks will be added or removed.
The Nasdaq 100 includes the 100 largest non-financial Nasdaq components.
How Is the Nasdaq 100 Weighted?
The Nasdaq 100 index is a modified market-capitalization index. Market valuation is the largest factor, but with methodology to limit overconcentration.
Nasdaq 100 Weights Of Magnificent Seven
Company Ticker Weight Market cap, in trillions (as of July 7) Microsoft MSFT 12.9% $2.51 Apple AAPL 12.5% $2.99 Nvidia NVDA 7.0% $1.05 Amazon AMZN 6.9% $1.33 Tesla TSLA 4.5% $0.87 Meta Platforms META 4.3% $0.75 Alphabet GOOGL 3.7% $1.52 Alphabet GOOG 3.7%
The seven-largest companies in the Nasdaq 100 account for 55% of the index. It seems likely that this combined weighting will be reduced. It's also likely that there may be notable weighting shifts within these seven giants.
The current weights show that market capitalization is the dominant factor, but it's not the only one.
Microsoft stock has the largest weight, at 12.9%, as of July 7. Apple stock has a 12.5% weight, despite having a $2.999 trillion market cap vs. Microsoft's $2.51 trillion.
Google stock has a 7.4% weighting with the GOOGL and GOOG share classes combined.
Nvidia stock has vaulted to a 7% Nasdaq 100 weighting, thanks to its $1.05 trillion market cap. That's a slightly larger weight than Amazon stock (6.9%), even though the latter has a significantly higher valuation at $1.33 trillion.
Tesla stock and Meta Platforms round out the top-seven members, with weights of 4.5% and 4.3%, respectively.
Just for reference, for the entire Nasdaq composite, Apple stock had an 11.4% weighting as of July 7 while Microsoft was at 9.5%. GOOGL stock is at 5.8% while Amazon and Nvidia are at 5.1% and 4%, respectively. TSLA stock has 3.3% share and META stock is at 2.8%.
How Much Will Nasdaq 100 Megacaps Be Cut?
Based on Nasdaq 100 methodology, the combined weight of the five companies with the largest market caps will be set to 38.5%. The five-largest companies, Apple, Microsoft, Google, Amazon and Nvidia had a combined weight of 46.7%. That suggests some notable reduced weightings for these names.
Meanwhile, no component outside the top-five market cap companies can have a Nasdaq 100 exceeding the lesser of 4.4% or the weight of the stock with the fifth-largest market valuation. That points to at least a slight decline in TSLA stock's weight.
The official reweightings should be released on Friday, perhaps after the close. That will also include stocks that will see increased weightings.
Magnificent Seven Soar In 2023
The Invesco QQQ ETF (QQQ), which tracks the big-cap Nasdaq index, was up 37.5% in 2023 through July 7. The First Trust Nasdaq 100 Equal Weighted Index ETF (QQEW), which gives an equal weight to all 100 stocks, is up just 18.8%.
This largely reflects massive moves by megacaps this year. NVDA stock has nearly tripled (191%). META stock has soared 141% while TSLA stock is up 123%. AMZN stock has leapt 54.5%. AAPL stock has run up 47% and MSFT stock nearly 41%. Google stock is up a still-robust 35%.
There is some concern that this handful of names is distorting the health of the overall stock market, which is likely what's spurring the special rebalancing.
Will Nasdaq 100 Special Rebalance Affect Stock Prices?
The Nasdaq 100 special rebalance will spur stock allocation shifts among ETFs such as QQQ and mutual funds that track the index. So there could be some one-off gains or losses, perhaps as the planned changes are announced on July 14.
However, the impacts may be modest. For one, the big-cap Nasdaq index is going to adjust weightings, vs. a full addition or deletion. Also, far more money tracks the S&P 500, which is why S&P 500 component changes get a lot more attention than Nasdaq 100 moves.
The S&P 500 index, unlike the Nasdaq 100, is a pure market-cap weighted index.
Most of the "magnificent 7" stocks retreated Monday. Nvidia stock fell just 0.8%, while Apple slipped 1.1%. more than 1% intraday. Microsoft stock retreated 1.6%, TSLA 1.8% and Amazon 2%. GOOGL stock sank 2.5%.
The one exception: META stock climbed 1.2%, as Meta's new Threads app topped 100 million sign-ups in less than a week.
Megacaps weighed on the Nasdaq 100, which fell intraday before eked out a gain. The equal-weight QQEW jumped 1.8%.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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Source: Investor's Business Daily
