Tech Giants Spark Nasdaq Rebalance

On Monday we have witnessed the implementation of the previously communicated rebalancing within the Nasdaq 100 index due to the growing size of its biggest tech companies, which has led to an imbalance in the index. The need for rebalance was triggered when the companies with weightings exceeding 4.5% saw their combined weighting exceed 48%. To address this, the rebalance has capped their combined weighting at 40% in accordance with the index methodology and thus reducing the index’s concentration in its largest constituents.

The primary objective of this action was to augment the representation of lesser-capitalized constituents while concurrently mitigating the overwhelming influence exerted by what the financial market has dubbed as “The Magnificent Seven”. As of last week, this esteemed group, comprising of Microsoft, Nvidia, Meta Platforms, Apple, Tesla, Alphabet, and Amazon was holding a collective weight close to half of the Nasdaq 100.

This portfolio realignment has been undertaken to foster a more diversified composition within the index and reduce the concentration risk posed by these dominant tech giants. The potential disruption is limited in scope, given the proactive portfolio adjustments already executed by exchange-traded funds (ETFs) that track the Nasdaq 100, aligning their holdings with the opening values of the trading session yesterday.

The Nasdaq 100 Index methodology allows for special rebalances if necessary to maintain the index’s integrity. This was the third Special Rebalance in the index’s history, with previous ones occurring in 1998 and 2011. However, the special rebalance will not involve removing or adding any securities, but rather seeks to decrease the dominance of the “Magnificent Seven” tech giants.

Source: TradingView

The dominance of these mega-cap tech stocks led to remarkable returns in the Nasdaq 100, with the index rallying 49% from the onset of the year. The leading Relative Strength Index indicator is firmly in its bull market range pointing to higher levels in the months ahead. Despite Monday’s rebalance, given the expected minimal impact on the index, the constructive price structure and the strong momentum conditions, a re-test of the previous all-time high is feasible.

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