Microsoft and NVIDIA are expected to have the largest decrease in proportion, with a decrease of about 3 percentage points to 9.8% and 4.3% respectively. Apple will regain the top spot with a relatively small decrease of less than 1 percentage point to 11.5%.
On the next Monday, July 24th, the Nasdaq 100 Index will undergo a "special rebalancing." It remains challenging to predict the actual new weights of the mega-cap stocks because their market values fluctuate daily until the rebalancing takes effect before the market opens on Monday.
According to a report by Goldman Sachs, using July 3rd as the reference date and estimating data from this Monday, the total weight of the "Big Seven" technology companies will decrease from 55.1% to 43.7%.
Microsoft and Nvidia are expected to have the largest decrease in their proportions, each dropping by about 3 percentage points to 9.8% and 4.3%, respectively. Apple is expected to regain the top spot with a relatively small decrease of less than 1 percentage point to 11.5%.
The weight reduced from the Big Seven will be distributed to other constituents of the index, with Broadcom, Adobe, PepsiCo, and Costco Wholesale benefiting the most.
According to the market value rebalancing rule, no single constituent of the Nasdaq 100 can have a weight exceeding 24%, and the combined weight of constituents with weights exceeding 4.5% cannot exceed 48%. Otherwise, it will be reduced to 40%.
Currently, the latter rule has been triggered. As of July 3rd, each of the six giants in the Nasdaq 100 had a proportion exceeding 4.5% throughout the week, with a total weight of 51%.
Meta is the only mega-cap stock among the Big Seven with a weight below 4.5%. However, analysts point out that Meta is also unlikely to be spared in the end because if the weights of the other six giants are reduced and reallocated to other constituents, Meta's weight may rise to the extent that it needs to be adjusted.
So, what will be the impact of the rebalancing?
Goldman Sachs believes that it may not be as significant as logically indicated.
Although changes in index weights will lead to corresponding adjustments in passive index funds' positions, causing some turbulence, since Nasdaq announced the "special rebalancing" on July 10th, all the impacts have been known or can be speculated, so it is difficult to say how significant the impact will be.
The stock price trends show that investors have already made some trades in anticipation of the adjustment, but the selling pressure on blue-chip technology stocks was short-lived. Since last Tuesday, the average return of the seven major Nasdaq 100 constituents has been 5%, higher than the overall return of the Nasdaq 100 by 3.5%.
Goldman Sachs also estimates that among the top 25 constituents, only Alphabet, the parent company of Google, had a passive sell volume that exceeded its average daily trading volume. As for passive purchases, it may be worth paying attention to PepsiCo, Costco, and Honeywell.
However, precedents indicate that the outcome will be calm. The last special rebalancing of the Nasdaq 100 was in 2011 when Apple's weight had risen to a disturbing 20%. As a result, although a significant portion of Apple's shares were reallocated to Microsoft, Apple's stock price was not affected to the extent that this adjustment was easily forgotten.
Goldman Sachs strategists, including David Kostin, pointed out in a report:
"The rapid rise of large-cap tech stocks and their increased weight in benchmark indices have prompted mutual funds to continue reducing their holdings of these stocks, which in turn has posed significant resistance to the relative returns of these funds. Only 31% of large-cap funds have outperformed the benchmark this year."
Goldman Sachs believes that a special rebalancing of the Nasdaq 100 is unlikely to address the challenges posed by the increasing concentration for many investors.
The actively managed assets of mutual funds benchmarked to the Nasdaq 100 are only $10 billion, much lower than the $2 trillion managed by funds tracking the S&P 500 and the $805 billion managed by the Russell 2000.
Meanwhile, even if the Nasdaq 100 undergoes rebalancing, the combined weight of constituents with weights exceeding 5% will still reach 32%, which will remain overly concentrated and fail to meet the diversification requirements of actively managed funds set by the U.S. Securities and Exchange Commission (SEC).