That Nasdaq 100 Rebalancing Likely Won’t Change Much

While major index rebalancings might seem seismic in scope, they often fail to change things very much. The evidence lies in past revamps, and projections for the current one that look like more of the same.

The just-announced change in the weightings of the tech-oriented Nasdaq 100 (the largest valued stocks in the Nasdaq Composite) are designed to remedy the outsized influence of Big Tech—namely the so-called Magnificent Seven, headed by Apple. As of June 30, the seven stocks constituted almost half of the index’s $15.4 trillion market cap. Impelled by federal rules that forbid any group of stocks to command that much, parent Nasdaq intends to whittle the seven’s portion back to 40%.

“This won’t have a huge impact,” says Burns McKinney, senior portfolio manager at NFJ Investments, of the overhaul. “The tech giants have surged so much and have massive amounts of liquidity.”

In other words, the seven will continue to have a sizable sway over the index, and their prices won’t be harmed. The Nasdaq 100 is ahead 39.2% this year, as compared with 15.6% for the broad-market S&P 500.

The announcement on Monday took a very temporary toll on the seven mega-cap stocks. All but one fell Monday: Microsoft suffered the most, losing 5.4%, and Apple the least, dipping 2.1%. The exception was Facebook parent Meta Platforms, which gained 3.6%, likely due to the popularity of its new social media entry, Threads.

By Tuesday, that downdraft had passed like a bad dream. Six of the tech titans were back in the black, ranging from Amazon’s 1.3% jump to Tesla’s 0.07% increase. The only loser was Apple, slipping a scant 0.3%.

They all have enjoyed enormous gains in recent years, with the party continuing in 2023. Typical is the trajectory of computer chipmaker Nvidia, up 196% year to date. Of the seven, the laggard is Alphabet, owner of Google, ahead 28%. Note that the larger S&P 500, in which the tech gargantuans also have an outsized presence, was positive both Monday and Tuesday.

The pending Nasdaq 100 weight decreases—Nasdaq will release the details Friday, to take effect on July 24—will be minor, according to estimates by Wells Fargo analysts. The largest trim will be to Microsoft, losing 1.8%, followed closely by Apple’s 1.7%, the bank contended.

In the last Nasdaq 100 rebalancing, in April 2011, the downsizing mostly focused on Apple, which then commanded 20% of the index (its weight lately is 12.9%). After the weight reduction a dozen years ago, Apple’s price inched down by just four cents. By year-end 2011, it had soared 19.5%.

This year’s very public two-week run-up to the reordering of the index’s components is meant to allow investors and funds that track the Nasdaq 100 ample time to make adjustments in an orderly fashion—which would not be the case if the new weighting were suddenly announced after the fact. “Our aim is to provide transparency,” says Cameron Lilja, global head of index product and operations at Nasdaq.

Certainly, index funds and institutional investors that craft their own in-house replicas will be busy over the next several weeks to realign their holdings. The Nasdaq 100 is rebalanced four times per year, at the end of every quarter. But this time its corporate parent chose to do a special reweighting because the Magnificent Seven were getting dangerously near the federally mandated cap of 50% for any stock grouping.

The alteration for the seven is hardly unexpected to NFJ’s McKinney, who observes, “It’s indicative of their overvaluation.”