How Nasdaq-100 ‘special rebalance’ has impacted the big seven tech stocks

The rebalance aims to address overconcentration in the index in just a handful of companies, writes Sam Benstead.

The extraordinary performance of America’s largest tech stocks has prompted a change in the make-up of one of the world’s most influential stock market indices.

Hype around the future potential of artificial intelligence has boosted the share prices of America’s seven big tech stocks this year, which are all listed on the New York-based Nasdaq exchange.

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A popular way of owning technology stocks is to own passive funds that track the Nasdaq-100 index – the 100 largest stocks in the index, weighted according to their market cap.

Morningstar, the fund data provider, calculates that funds tracking the Nasdaq-100 index total nearly $300 billion (£230 billion) globally. Influential exchange-traded funds in the UK include the Invesco EQQQ NASDAQ-100 ETF and the iShares NASDAQ 100 ETF.

So far in 2023, chipmaker Nvidia is up 232%, Tesla is up 160%, Facebook-owner Meta Platforms is up 149%, Amazon has risen 58%, Apple is up 52%, Microsoft has risen 44% and Alphabet is up 40%.

In dollar terms, the Nasdaq-100 index has risen 43% this year. However, because a large proportion of the gains came from the biggest companies, it has become more concentrated.

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As of the end of June 2023, Microsoft had a 12.8% weighting, Apple had a 12.2% weighting and Nvidia and Alphabet were around 7%. In total, the top 10 stocks accounted for around 55% of the portfolio.

Following a “special rebalance” from Nasdaq to address overconcentration, allocations to the largest tech stocks have been cut. The changes took effect this week.

The new breakdown reduces the share of the top 10 stocks to 43%, with the largest percentage cuts to Nvidia and Microsoft. 

Nasdaq said: “Microsoft and Nvidia experienced the most significant cuts, each down about 3%, while Apple regained the top spot with a relatively small decrease of 1%. Broadcom Inc (NASDAQ:AVGO) saw the biggest increase in weighting, rising from 2.5% to 3.1%.”

Apple will now be 11.6% of the index, Nvidia will be 4.2% and Microsoft will be 9.8%.

Other key changes included Alphabet moving from 7.3% to 5.4% of the index, Amazon dropping from 6.7% to 5.1%, Tesla moving from 4.2% to 3.2% and Meta (Facebook) going from 4.3% to 3.5%.

Source: Nasdaq, 24 July 2023.

Morningstar says that there could be some extra costs involved for passive investors tracking this index due to trading fees. It adds that this will be the third special rebalance in the history of the Nasdaq-100 index, with the first two coming in 1998 and 2011. The constituents remain the same, it is just the weightings that change.

Investors who are still worried about overconcentration could look to own an equally weighted index, where each stock is roughly the same.

One fund option is the newly launched Invesco Nasdaq 100 Equal Weight Ucits ETF, constructed from the same constituents as the parent Nasdaq-100 index but equally weights the issuers at each quarterly rebalancing date, rather than weighting them by their market capitalisation.

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The information technology sector represents just over half of the parent index but 35% of the equal weighted index. The more significant difference is at the individual stock level, where the top 10 holdings make up 60% of the parent index but only 10% of the equal weighted index when it rebalances. It will cost 0.2% a year.

How to invest in AI

The Nasdaq-100 has performed extremely well this year as it got a boost from companies involved in artificial intelligence, such as Meta and Microsoft, but fund manager WisdomTree argues that investors hoping to profit from the theme should look beyond it.

Elvira Kuramshina, a quantitative researcher at WisdomTree, says targeted AI funds will own pure-play AI companies rather than just a handful of companies that would offer a less comprehensive and less pure exposure to the theme.

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Kuramshina said: “Look at Tesla and Nvidia. Investing in them three months after they went public would have resulted in much higher annualised returns in comparison to returns after they joined the Nasdaq-100.

“In addition, it took both companies around two to three years to join the tech benchmark and, after they did, their starting weights were only 0.40% to 0.50%. In contrast, thematic strategies might invest in companies shortly after their initial public offering and might allocate a more meaningful weight to them.”

Funds buying stocks involved in AI include the WisdomTree Artificial Intelligence UCITS ETF, the L&G Artificial Intelligence UCITS ETF, and Sanlam Global Artificial Intelligence.