It’s “a good thing as it reduces the concentration risk from those players,” said Todd Sohn, managing director of ETF and technical strategy at Strategas Securities. “On the other hand, it increases the burden for the rest of the index — what I like to call ‘the bench’ — to continue to improve and strengthen.”
While details on the action are sparse, a paper on the Nasdaq website says special rebalancings can be called in certain circumstances when the portion represented by the index’s biggest members exceeds a preset threshold. In one scenario, the document says, weights can be pared back if the combined influence of the largest companies — those making up 4.5 per cent or more of the gauge — adds up to more than 48 per cent.
Data compiled by Bloomberg show that was the case on July 3, when six companies — Microsoft, Apple, Alphabet Inc., Nvidia Corp., Amazon.com Inc., and Tesla Inc. — saw their combined weight reach 50.9 per cent. The Nasdaq methodology paper says a rebalancing may be enacted to reduce the group’s influence to 40 per cent.
All the stocks in that group fell July 10, with shares of Microsoft and Amazon dropping more than two per cent. The traditional version of the Nasdaq 100 was little changed as of 2:30 p.m. in New York. By contrast, the one that strips out market cap bias climbed 1.7 per cent, a drastic reversal from the previous six months, when it trailed by 18 percentage points.
“Megacap tech is underperforming today on the rebalance announcement,” said Alon Rosin, Oppenheimer & Co.’s head of institutional equity derivatives. “They all got hammered relatively as we are seeing money rotations elsewhere.”Article content