NASDAQ makes a rare adjustment

Karl O.Strøm
17. juli 2023 | 3 Læsetid

This month the NASDAQ 100 index will do a rebalancing act.

At the end of June, I published a post which showed how concentrated the world's listed market capitalization is currently in a small number of American companies. If you buy a global fund, it may be good to know that close to 70% are invested in the USA, and that, for example, Apple alone has a greater weight than the entire world's energy sector. Significant price gains for a small number of large US technology companies have driven this market narrowing to an extreme level, and it is interesting to see that a rare move is now being made in the US to counter some of this.

The NASDAQ 100 “Special Rebalance”

In a press release on 7th of July, the American NASDAQ stock exchange announced that it will carry out a "Special Rebalance" of the NASDAQ 100 index. This is the index on which futures and options are traded and which is the benchmark index for the ETF QQQ, one of the oldest and largest US-listed exchange-traded funds. Internationally, too, there are a number of ETFs and trading products that use this index as a reference, including some of those offered by Vontobel to traders in the Nordics.

So one might ask why this happens, whether it is common and what it means in practice?

First, we can establish that it is not common. According to a spokeswoman for NASDAQ, such a rebalancing has only happened twice before, in 2011 and 1998. The reason why it must be done now this summer is precisely the market concentration in a few large companies that I described in the blog post mentioned above. When one or a few companies get too large market weight in an index, this can create problems for asset managers and other players who use this as a benchmark index. The underlying consideration is that a large concentration in individual companies can increase risk for investors, but the direct reason that is forcing changes now is that the weightings are starting to creep up towards or exceed statutory weighting limits in various surrounding regulations. This phenomenon is also known in Norway. Equinor's full market value as a percentage of Oslo Børs total value is too large for ordinary mutual fund managers to legally replicate in their funds. They therefore use OSEFX (the fund index) as a reference instead of OSEBX. OSEFX has the same weighting limits that the managers themselves must legally comply with.

The adjustment now being made in the NASDAQ 100 is an internal rebalancing of the index. The weighting of Microsoft, Apple, Nvidia, Tesla, Alphabet (Google) and Amazon (possibly also Meta) will be reduced somewhat, and almost all the other shares in the index will be given a slightly higher weighting. For the owner of an index product linked to the NASDAQ 100, this will not be of any great importance. Nor will it reduce the weighting of American shares in the world index.

Some traders have taken positions on assumptions/calculations of rebalancing effects since the change was announced, and this may possibly explain the strength in some small-cap NASDAQ 100 stocks in recent days while the 5-7 majors have been more quiet. In recent history, however, it has proved difficult to profitably speculate on such index effects.

So what should an investor do? Nothing is necessary, but it is always interesting to observe that market concentration has now reached such levels that historically rare adjustments are being made. I myself sympathize with arguments stating that it is the real market values ​​that should form the basis of an index. Here, however, it must be recognized that the current regulations do not agree.


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