Nasdaq-100 undergoes special rebalancing

Nasdaq-100 undergoes special rebalancing

A special rebalancing of the Nasdaq 100 took place before the market opened on Monday, July 24, to remedy the index's over-concentration. The Nasdaq has only carried out a special rebalancing twice in its history: in December 1998 and in May 2011.


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A significant reduction in the weight of the tech giants

On July 24, Nasdaq carried out a "special rebalancing" of its Nasdaq 100 index, a major change in view of the disproportionate weighting held by a few major tech companies, known as the Magnificent Seven: Microsoft Corp, Apple Inc, Nvidia Corp. Inc, Meta Platforms Inc, Tesla Inc and Alphabet Inc.

According to data from the most popular ETF replicating the Nasdaq 100, QQQ, Microsoft has the highest weighting at 12.7%, followed by Apple (12.3%) and Alphabet's class A and class B shares combined (7.2%). If we add to the trio the weight of Nvidia (6.9%), Amazon (6.7%), Tesla (4.4%) and Meta (4.3%), we have 7 companies that weigh far more than the other 93.

Since July 24, the weight of these tech giants has been reduced from 56% to 44% in the Nasdaq 100 index. Although Apple and Microsoft remain the largest companies in the index, their weight has been reduced to 12% and 10% respectively.



The reasons for this rebalancing

The Nasdaq 100 is reconstituted every December but must also be rebalanced whenever the total weight of companies with more than 4.5% each in the index exceeds 48%. This weighting must then be reduced to 40%. At the beginning of July, the seven tech giants accounted for 56% of the weight of the Nasdaq 100 index.

In addition, this rebalancing decision aims to reduce the risks associated with the over-representation of a few tech companies, and to promote a better distribution of stocks within the index.



Some companies have gained weight

This rebalancing decision is designed to reduce the risks associated with the over-representation of a few tech companies, and to promote a better distribution of stocks. While these tech giants have lost some of their market weight, others have mechanically gained weight. Among the companies gaining the most weight because of this rebalancing is Broadcom, whose share of the index now stands at 3%.

In addition, Mondelez International (Lu cookies, Milka and Toblerone chocolates, Tang beverages) has also seen its share of the index increase. The stock had already revised its targets upwards following the presentation of its first-half results, with a 19.4% increase in revenues ($9.17 billion). This increase is more significant in view of soaring energy prices.


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The History: How Nasdaq Was Born

The Nasdaq Composite is one of the three benchmark indices in the United States (alongside the Dow Jones and S&P 500), comprising virtually all market capitalizations listed on the Nasdaq Stock Exchange. Created in 1971, with an initial value of 100 points, the Nasdaq now has a value of just over 13,000 points (13,973.45 points as at 03/08/2023).

There is also a smaller version of the index, the Nasdaq 100, which, as its name suggests, includes only the 100 largest market capitalizations in the Nasdaq Composite.