{"id":34784,"date":"2023-07-12T17:47:13","date_gmt":"2023-07-12T21:47:13","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/nasdaq-is-making-a-big-change-to-its-most-popular-index-heres-how-it-might-impact-your-portfolio\/"},"modified":"2023-07-12T17:47:14","modified_gmt":"2023-07-12T21:47:14","slug":"nasdaq-is-making-a-big-change-to-its-most-popular-index-heres-how-it-might-impact-your-portfolio","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=34784","title":{"rendered":"Nasdaq is making a big change to its most popular index. Here\u2019s how it might impact your portfolio."},"content":{"rendered":"

Big Tech has gotten too big for Nasdaq\u2019s liking. <\/p>\n

So the exchange has decided to make some changes to the Nasdaq 100 index, its most popular index, according to company representatives, ostensibly to diminish the concentration risk that accompanies having an index that derives more than half of its value from just seven companies. <\/p>\n

\n

Nasdaq announced late last week that the Nasdaq 100
\n NDX,
\n +1.24%<\/bg-quote>
\n will undergo a special rebalancing that will take effect prior to the market open on\u00a0July 24. It\u2019s only the third time that Nasdaq has announced such an impromptu rejiggering of how much individual stocks contribute to the index. Although Nasdaq can also reconstitute the index regularly every December, and there\u2019s also a mechanism to rebalance every quarter as well. <\/p>\n

In a statement announcing the move, the exchange alluded to the fact that the largest companies in the technology sector have too much sway over the index\u2019s price. Nasdaq said special rebalancing can be implemented \u201cto address overconcentration in the index by redistributing the weights.\u201d<\/p>\n

The rebalancing comes at a critical time. The Nasdaq 100 has risen 40% since the start of 2023, largely thanks to the \u201cMagnificent Seven,\u201d a handful of megacap technology names that have powered much of the U.S. stock market\u2019s rally this year.<\/p>\n

These gains have pushed the index to its highest level since mid-January 2022, meaning that Big Tech has now retraced nearly all of last year\u2019s losses, and might soon be headed for the all-time highs from November 2021. <\/p>\n

As of Thursday, the Magnificent Seven stocks \u2014 Nvidia Corp.
\n NVDA,
\n +3.53%<\/bg-quote>,<\/span>
\n Apple Inc.
\n AAPL,
\n +0.90%<\/bg-quote>,<\/span>
\n Microsoft Corp.
\n MSFT,
\n +1.42%<\/bg-quote>,<\/span>
\n Amazon.com Inc.
\n AMZN,
\n +1.57%<\/bg-quote>,<\/span>
\n Tesla Inc.
\n TSLA,
\n +0.82%<\/bg-quote>,<\/span>
\n Meta Platforms Inc.
\n META,
\n +3.70%<\/bg-quote>
\n and Alphabet Inc.\u2019s Class A
\n GOOGL,
\n +1.53%<\/bg-quote>
\n and Class C
\n GOOG,
\n +1.62%<\/bg-quote>
\n shares \u2014 accounted for 55% of the Nasdaq 100\u2019s market capitalization, while the top five names account for more than 45%. <\/p>\n

According to Nasdaq\u2019s official methodology, the goal is to keep the aggregate weighting of the biggest stocks below 40%. In fact, it\u2019s possible that Tesla Inc. surpassing 4.5% of the index earlier this month triggered the Nasdaq\u2019s rebalancing announcement, according to analysts from UBS Group AG
\n UBS,
\n +1.87%<\/bg-quote>.<\/span>\n <\/p>\n

Exactly how it plans to accomplish this isn\u2019t yet known. Nasdaq said the new weighting scheme will be unveiled on Friday, likely after the U.S. market close. But the UBS team has an educated guess.<\/p>\n

\u201cThe quarterly reviews would dictate that the aggregate weight to securities exceeding 4.5% be set to 40%. If that\u2019s the approach Nasdaq takes, then we\u2019d expect the weights of Microsoft, Apple, Nvidia, Alphabet, Amazon, and Tesla to be reduced,\u201d the team said in a note shared with MarketWatch. <\/p>\n

For investors trying to anticipate how this might impact their portfolios, here the answers to a few key questions. <\/p>\n

Could the rebalancing kill the U.S. stock market rally? <\/h2>\n

Not likely. Or rather: if the rally in Big Tech does falter, history suggests it won\u2019t be because of the rebalancing. <\/p>\n

Here\u2019s more on that from Nicholas Colas, co-founder of DataTrek Research, who discussed the topic in commentary emailed to MarketWatch on Wednesday. <\/p>\n

\u201c\u2026[T]here is the natural inclination to think that the upcoming special reweighting is a sign that large cap disruptive tech is set to roll over because a handful of names have so handily outpaced the rest of its notional peers,\u201d Colas said.<\/p>\n

\u201cHistory suggests otherwise. The last 2 one-off reweights were in 2011 and 1998. Neither proved to be the end of a Nasdaq 100\/tech stock bull market. Not even close, really.\u201d<\/p>\n

More immediately, ETF experts expect trading around the rebalancing will be relatively muted. <\/p>\n

\u201cWhile it sounds scary, Investors are well positioned \u2014 this has been well bantered about,\u201d said David Lutz, head of ETF Trading at Jones Trading, in comments emailed to MarketWatch. <\/p>\n

How could this benefit investors? <\/h2>\n

Since megacap technology stocks don\u2019t pay much, if anything, in dividends, the rebalancing could increase the amount of dividends that ETF investors receive each year, according to a team of analysts at JPMorgan Chase & Co. <\/p>\n

Since the largest constituents pay a dividend yield well below the index average, the redistribution of weight from them to the rest of the index will result in a \u201cmeaningful boost\u201d to the regular payouts received by investors, which will boost the total return of Nasdaq 100-tracking ETFs and mutual funds. <\/p>\n

Will there be any short-term costs associated with the rebalancing?<\/h2>\n

There might be. Since the new index weightings will be announced in advance, investors will have plenty of time to front-run the rebalancing trade. <\/p>\n

Still, there are plenty of hedge funds and proprietary trading firms that run strategies explicitly designed to profit from rebalancing. These firms profits have to come from somewhere, and the logical place would be the fund managers of the Invesco QQQ exchange-traded fund
\n QQQ,
\n +1.26%<\/bg-quote><\/p>\n

QQQM,
\n +1.27%<\/bg-quote>.<\/span>\n <\/p>\n

\u201cThere are prop traders and hedge funds that run the strategy of providing liquidity to indexes with the expectation that they\u2019ll earn profits,\u201d said Roni Israelov, president and CIO at Wealth Manager NDVR, during a phone interview with MarketWatch. <\/p>\n

\u201cif they are earning profits by providing that liquidity, the expectation is those profits are being paid by investors in those funds.\u201d<\/p>\n

So far at least, markets appear to have taken news of the rebalancing in stride. Megacap technology names tumbled earlier this week, but they\u2019ve since recouped those losses and then some. <\/p>\n

The Nasdaq Composite
\n COMP,
\n +1.15%<\/bg-quote>,<\/span>
\n another Nasdaq index that isn\u2019t quite as heavily weighted toward Big Tech, rose 1.2% to 13,918.96. <\/p>\n<\/p><\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Big Tech has gotten too big for Nasdaq\u2019s liking. So the exchange has decided to make some changes to the Nasdaq 100 index, its most popular index, according to company representatives, ostensibly to diminish the concentration risk that accompanies having an index that derives more than half of its value from just seven companies. Nasdaq […]<\/p>\n","protected":false},"author":1,"featured_media":34785,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-34784","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nNasdaq is making a big change to its most popular index. Here\u2019s how it might impact your portfolio. | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Big Tech has gotten too big for Nasdaq\u2019s liking. 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