Nasdaq 100 special balancing. What does it mean?

Apple Lossless Audio CODEC (ALAC), i Microsoft MSFT and the rest of the big tech companies have become too big for the Nasdaq 100 - and the index provider has a solution to that problem. Unfortunately, this solution is a problem for the Big Seven big-tech companies.

Big tech is too big

One of the obstacles to the growth of tech stocks this year was the huge role played by the most valuable tech companies in the market by market capitalization. This created a particular problem for the Nasdaq 100 Index, which tracks the top 100 Nasdaq-listed companies.

As a solution, Nasdaq announced plans to rebalance the scales in a special way Nasdaq xnumx later this month to address over-concentration in the index.

This is not a minor change on the Nasdaq

According to Nasdaq, at the end of 2021, there were more than $300 billion in exchange-traded funds tracking the index, and now the sum is undoubtedly much higher. Fund itself Invesco QQQ ETF (QQQ), which tracks the Nasdaq 100, has over $200 billion in assets. As a result, indexers will have to sell some of their shares in the largest components of the index and supplement their positions in other stocks.

Nasdaq special rebalancing on July 24

Late last week, the Nasdaq Exchange announced that the Nasdaq 100 Index will undergo a special rebalancing that will take effect before the market opens on Monday, July 24, 2023. As described in the index's published methodology, special rebalancing may be performed to address excessive concentration in the index by redistributing the weightings. The special rebalance will not remove or add any securities, the exchange said in a statement.

The Nasdaq 100 comprises the top 100 domestic and international non-financial companies listed on Nasdaq and serves as the benchmark for many financial products around the world, including ETFs, mutual funds, futures and options. The index is typically rebalanced annually in December, with additional rebalancing opportunities quarterly. The special rebalance of the index will be implemented based on the securities and shares of the index outstanding as of July 3, 2023, and the announcement of the index shares and the publication of the pro-forma file will take place on July 14, 2023.

Nasdaq special rebalancing story

Nasdaq held a special rebalance only twice - in December 1998 and May 2011. Nasdaq rules state that if all stocks weighing more than 4,5% in an index exceed 48%, then Nasdaq rebalances the index. Under Nasdaq rules, the balancing process sets the total weighting of shares weighing 4,5% or more at 40%.

Given the surge of six stocks that were at or above 4,5% at the time of the last rebalance, it seems likely that the weighting of all six will be adjusted as a result.