ETFs tracking the Nasdaq 100 are expected to undergo changes later this month following a special index rebalance that aims to address overconcentration within the largest constituents.
The Nasdaq 100 serves as the world’s pre-eminent benchmark for growth-oriented investing.
The Nasdaq 100 is the world’s pre-eminent benchmark for the performance of growth-oriented stocks, serving as the underlying reference for numerous financial products that collectively house many hundreds of billions of dollars in AUM.
The index consists of 100 of the largest US and international non-financial companies by market capitalization listed on Nasdaq. It includes companies across major industry groups including computer hardware and software, communications, retail/wholesale trade, and biotechnology.
The Nasdaq 100 has jumped 37.4% year-to-date (as of 7 July) following a revitalization of the ‘tech trade’ in 2023 that is being driven by the Federal Reserve’s less aggressive stance on interest rates. Amid this risk-on environment, many mega-cap technology companies have experienced outsized gains as investors digested the implications of a potential leap in artificial intelligence capabilities.
The rally has, however, resulted in greater concentration within the Nasdaq 100’s largest constituents, leading index provider Nasdaq to announce a special rebalance that will enforce diversification rules.
The index’s methodology states that Nasdaq will take action if the largest constituent exceeds a weight of 24% or if the aggregate weight of all stocks with individual weights above 4.5% is greater than 48%.
While the largest constituent, Microsoft, commands a weight of 12.9%, well below the threshold for diversification rules to apply, the largest seven constituents currently collectively account for 51.2% of the index’s total exposure. They are Microsoft (12.9%), Apple (12.5%), Alphabet (7.4%), Nvidia (7.0%), Amazon.com (6.9%), and Tesla (4.5%).
According to rebalancing rules, the weight of these constituents will be proportionally reduced such that their aggregate weight in the index does not exceed 40%. These changes are expected to be implemented prior to the market opening on Monday, 24 July 2023.
Affected ETFs include the $200 billion Invesco QQQ (QQQ US) which serves as the go-to product for highly liquid Nasdaq 100 exposure in the US. The fund comes with an expense ratio of 0.20%.
In Europe, there are several ETFs tracking the Nasdaq 100. The largest in the space include the $10.3bn iShares Nasdaq 100 UCITS ETF (CNDX LN) and the $7.0bn Invesco EQQQ Nasdaq 100 UCITS ETF (EQQQ LN) which come with expense ratios of 0.33% and 0.30%, respectively. The cheapest, meanwhile, is the recently launched AXA IM Nasdaq 100 UCITS ETF (ANAU GY) which has a price tag of just 0.14%.