The Nasdaq 100 is undergoing a “special rebalancing” for only the second time in 25 years, resulting in significant shifts in weightings for the index’s largest stocks. Ahead of the rebalancing, Goldman Sachs Group Chief U.S. Equity Analyst, David Kostin, shared the new weightings with his clients and the press in a recent report. Here are the notable changes highlighted in Kostin’s note:
Weight Reduction for Top Stocks
The seven stocks with the heaviest weightings in the Nasdaq 100 will see their collective weight decrease from 56% to 44%. This adjustment aims to reduce the dominance of these stocks in the index and provide a more diversified representation of the market.
Information technology will continue to maintain its prominent position within the index, accounting for approximately half of its composition. However, the sector’s weight will be slightly reduced from 51% to 49%. This change reflects a desire to mitigate risks associated with overexposure to a single sector.
Changes to Apple Inc. and Microsoft Corp.
Apple Inc. and Microsoft Corp. will retain their status as the largest constituents of the Nasdaq 100, but their respective index weights will be reduced by approximately four percentage points. Apple Inc. will hold a weight of 12%, while Microsoft Corp.’s weight will be adjusted to 10%. Despite this reduction, both tech giants will continue to play a significant role in shaping the performance of the index.
Surge in Broadcom’s Index Weight
Broadcom’s index weight will experience the most substantial increase during this rebalancing. The company’s weighting will surge by 64 basis points to reach 3%. This adjustment reflects Broadcom’s growing influence and prominence within the Nasdaq 100.
The impact of these new weightings on the index’s 25 largest constituents is summarized in the following chart prepared by the Goldman Sachs analyst:
These changes reflect the ongoing efforts to ensure the Nasdaq 100 remains an accurate representation of the market and a valuable tool for investors. As the rebalancing takes effect, market participants will closely monitor how these weight adjustments influence the performance of the index’s constituents.
Nasdaq 100 Outperforms Nasdaq Composite
According to representatives from Nasdaq, the Nasdaq 100 has emerged as the most popular index of the exchange. In comparison to the broader Nasdaq Composite, which includes all companies traded on the exchange, the Nasdaq 100 has showcased stronger performance this year. FactSet data reveals that the Nasdaq 100 is up by 41.2%, while the Composite has seen a growth of 34.4%.
Furthermore, EPFR data indicates that around $261 billion worth of mutual fund and exchange-traded fund assets are benchmarked to the Nasdaq 100. One popular investment vehicle linked to this index is the Invesco QQQ Trust (QQQ), which is commonly referred to by its ticker symbol. Of the total assets benchmarked, over $250 billion is invested in passive benchmark-tracking strategies.
To mitigate concentration risk arising from a surge in its seven largest components earlier this year, Nasdaq made the decision to implement a special rebalancing. According to official index-management methodology, Nasdaq aims to maintain a combined weighting of its largest constituents at 40%.
Despite these changes, experts such as Kostin do not anticipate a significant impact on the markets. Kostin argues that the previous special rebalancing did not have a substantial effect on the index either.
On Monday, both the Nasdaq 100 and Nasdaq Composite experienced slight declines, with big-tech names continuing to underperform compared to the S&P 500 and the suddenly surging Dow Jones Industrial Average. The Nasdaq 100-tracking QQQ was down by 0.2% at $374 per share on Monday morning, while the Nasdaq Composite saw a similar decline of 0.2%, reaching 14,013 points.