The Nasdaq 100 – one of the best-known and best-performing stock market indices – is rocked today. And some of the “Special Rebalancing” changes might surprise you.
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The biggest surprise of all? One of the so-called “Magnificent Seven” stocks, Metaplatforms (META), is dodging pending changes, according to analysis by Bespoke Investment Group. Meta’s weight in the Nasdaq 100 will increase slightly.
The stock skates through rebalancing rules designed to limit the weight of dominant stocks in the index. The Nasdaq 100 holds the 100 most valuable non-financial stocks on the Nasdaq.
This twist shows how difficult it is to tame the outsized influence of this group of stocks on the markets, says Robert Maltbie, fund manager at Argonaut 2000 Partners. “Everyone is wrapped around these seven actions,” he said.
Apple is not the best change from the Nasdaq 100
What is driving the rare special Nasdaq 100 rebalancing? It is triggered when all Nasdaq 100 stocks with individual weightings of 4.5% of market value collectively represent 48% or more of the index.
And it happened on July 3, with six actions: Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOGL), Amazon.co.uk (AMZN) and You’re here (TSLA). Together they accounted for 50.9% of the Nasdaq, Bespoke found. This is the third time since 1998 that this rebalancing has occurred.
And that raises another surprise. Apple is not the stock to see the biggest weight reduction in the Nasdaq 100. This is surprising as Apple is the most valuable stock in the Nasdaq 100, valued at around $3 trillion. But its weighting in the index is down just 2.66 percentage points from its July 3 level, Bespoke said.
That’s less than Microsoft’s 2.74 percentage point drop. The software giant’s weight in the Nasdaq 100 drops to 10.06 from 12.8. Microsoft’s big weight reduction is a holdover from the last special rebalancing of the Nasdaq 100 during the tech rally of the late 1990s. At that point, Microsoft alone accounted for a quarter of the Nasdaq 100.
The weight of meta-platforms is increasing (a little)
Why is Meta spared from the patella applied to others? It’s all about timing.
On July 3, the social media giant represented just 4.2% of the Nasdaq 100. That’s just below the 4.5% equilibrium threshold. That’s the interesting part. Since Meta is not directly part of the rebalance, her weight would increase to 5% as the weights of the other six giants are reduced. But Nasdaq rules cap weightings at 4.4%, which will be Meta’s new weight, according to Bespoke.
The Nasdaq 100 will always be the heaviest
Even after the special rebalancing, however, the Nasdaq will still depend on just a few giant stocks.
The six most valuable stocks in the Nasdaq 100 will still make up 40% of the index after the changes. That’s down from 50.9% on July 3, but still “very focused,” Maltbie says. And that exposes the index to risk, as many Magnificent Seven stocks are above historical averages.
“The Magnificent Seven created a statistical aberration,” he said.
Nasdaq 100 tends to perform well after special rebalances
You might think that these special rebalances might cut the wind from the sails of the Nasdaq 100. But that’s not true historically: the index tends to do well after these events.
After the 1998 rebalancing, the technology boom continued. The Nasdaq soared 112% in the 12 months following this rebalancing, Bespoke found. And even after the special rebalancing in May 2011, the Nasdaq 100 still rose by 9%.
“The 9% gain a year later isn’t too bad,” Bespoke said. “Based on these historical examples, the special Nasdaq rebalancing does not signal a major market catastrophe or reversal; if anything, a continuation of recent trends is the signal sent by limited precedent.”
How the Nasdaq 100 is changing
Business | Symbol | Weight July 3 | New weight | Ch. (percentage points) |
---|---|---|---|---|
Microsoft | (MSFT) | 12.80% | 10.06% | -2.74 |
Apple | (AAPL) | 12:45 p.m. | 9.79 | -2.66 |
Alphabet | (GOOGL) | 7.33 | 5.76 | -1.57 |
Nvidia | (NVDA) | 6.95 | 5.46 | -1.49 |
Amazon.co.uk | (AMZN) | 6.83 | 5.37 | -1.46 |
You’re here | (TSLA) | 4.53 | 3.56 | -0.97 |
Total | 50.89 | 40.0 | -10.89 |