2023-07-24 18:30:00
The situation had become untenable for the Nasdaq. While for several weeks, the price of a handful of tech companies had soared, driven by hopes around the development of generative artificial intelligence, the weight of these “magnificent seven” (Microsoft, Apple, Nvidia, Amazon, Meta, Alphabet and Tesla) had reached 56% of the total capitalization of the Nasdaq-100 index, according to calculations by Goldman Sachs. On Friday evening after closing, the composition of the basket was revised to bring this weight down to 44%. It is in particular Microsoft and Nvidia that saw their weighting drop sharply, dropping from 13 to 10% for the first and from 7.5 to 4.5% for the second.
A decision that gives a breath of fresh air to ETF providers that replicate this index, especially on the American side. “In the United States, ETFs must ensure that an individual security does not weigh more than 25% of the index, but also that securities weighing more than 5% do not represent, in aggregate, more than 50%,” said Christopher Mellor, head of European equity ETFs at Invesco. To maintain a margin of safety, Nasdaq even expects stocks that have a weighting greater than 4.5% do not exceed 48% of the index in total. Since the beginning of July, six of these titles have represented a cumulative 51%.” The limit thresholds imposed by American regulations were therefore very close, hence Nasdaq’s decision. In Europe, the pressure was less. “Ucits ETFs must comply with the so-called ’20/35′ rule (an individual security must not exceed 20% of the index, and 35% in certain circumstances, editor’s note), adds Christopher Mellor. This was widely respected: the most heavily weighted stock, Microsoft, was only 12.8% before the rebalance.
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This is the third time that Nasdaq has made such an exceptional “re-weighting”, apart from its classic quarterly changes. The previous one dates back to 2011, when Apple exceeded 20%. Although very rare, this movement did not cause panic among ETF investors. “Since the announcement of the rebalancing, we have seen some modest exits in Europe due to profit taking, and even entries in the United States”, specifies the representative of Invesco whose ETF QQQ in the United States brews 209 billion dollars in assets and its European equivalent 7.2 billion. The manager also did not wait for this adjustment and two weeks ago launched an equally weighted European version of his ETF on the Nasdaq. To radically eliminate any risk of concentration…
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