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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