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The rapid rise of a few already-massive tech stocks this year is causing Nasdaq to make unusual adjustments to its popular growth index.
The company announced July 7 that it will do a special rebalance of the Nasdaq 100 Index, which will take effect before the market opens July 24.
The Nasdaq 100 index comprises 100 of the largest nonfinancial companies that trade on the exchange and is often seen as a proxy for growth stocks. The index has surged about 37% year to date, well above the S&P 500 and the Dow Jones Industrial Average.
Nasdaq said a special rebalance can be used to “address overconcentration in the index by redistributing the weights.” The index is already rebalanced on a quarterly basis.
The special rebalance will help avoid a situation where issuers with individual weights above 4.5% account for more than 48% of the total index, as detailed in Nasdaq’s methodology. That limit is designed so that index funds tracking the Nasdaq 100 do not run afoul of regulatory rules governing the diversification of registered investment companies.
The five biggest stocks in the Nasdaq 100 — according to the holdings of the Invesco QQQ ETF, which tracks the index — appeared to be close to that limit as of July 10.
Invesco QQQ Top Holdings
| Ticker | Stock | Weight in fund |
|---|---|---|
| MSFT | Microsoft | 12.67% |
| AAPL | Apple | 12.31% |
| NVDA | Nvidia | 6.97% |
| AMZN | Amazon | 6.73% |
| TSLA | Tesla | 4.41% |
Source: Invesco
The QQQ’s holdings show how concentrated the index has become. The three largest positions — Microsoft, Apple and Nvidia — account for more than 30% of the fund combined, as Nvidia’s stock price has nearly tripled this year. The top 10 holdings account for a combined weighting of nearly 59%.
This is the third special rebalance on record for the Nasdaq 100. The company said it will announce new weightings July 14.
“The special rebalance is part of the Nasdaq-100 methodology and ensures that index-tracking funds maintain compliance with fund diversification rules. Nasdaq-100 special rebalances have taken place previously in 2011 and 1998,” Cameron Lilja, global head of index product and operations at Nasdaq, said in a statement.
The Nasdaq 100 has risen sharply this year.
There are several index funds that track the Nasdaq 100, including the QQQ, which has about $200 billion in assets under management.