Nasdaq is to undergo a ‘special rebalance’ today (Monday 24 July 2023) – due in large part to Tesla’s previously rocketing share price, which caused the firm’s weight on the Nasdaq 100 to surpass 4.5% earlier this month. With other tech firms also soaring, the exchange is nervy about the overweight – hence the quick fix. But will it last, amid market volatility?
By 17 July, the Nasdaq 100 had jumped by more than 42%, substantially more than the 17% gain of the S&P 500 and driven primarily by massive tech gains.
Microsoft, Apple, Nvidia, Amazon, Meta, Alphabet and Tesla constituted more than 55% of the index, thanks in part to the world going gaga over artificial intelligence (AI).
Nasdaq’s weight adjustment methodology dictates that when the aggregate weights of all issuers with an index weighting equal to or above 4.5% surpasses 48%, then their total weight is capped at 40%.
On 3 July, the aforementioned tech firms hit a combined total of 50.9%, activating the special rebalance.
The sum of these firms is to be reduced to 40% as of today.
Announced on 7 July, the special rebalance of the index will be enacted based on the index securities and shares outstanding as of 3 July, and the index share announcements and pro-forma file release which took place on 14 July.
Financial analytics firm Ortex expects the capped tech giants’ shares will experience selling pressures by passive funds, which will have to respond to the rebalance by reducing their tech weight.
However, passive demand will be also be driven by the uncapped securities in the index due to reallocation of capital from the sold shares – also known as re-weight.
According to Bloomberg, the tech rush remains unabated by the rebalance, with tech funds attracting US$1.8bn in the week to 19 July, the fourth consecutive week of inflows (compared to US$2.1bn of outflows in global equity funds over the same week).
Ortex expects the biggest passive inflows to centre around Meta (formerly Facebook), with almost $7 billion, which was expected to materialise as of the close of 21 July (Friday), and become effective as of 24 July.
However, with giants including Tesla and Netflix seeing their share price plummet last week on the back of poor Q2 results, could the trend be about to stall?
©Markets Media Europe 2023
