Nvidia, the chip giant, is on a meteoric rise, forcing major technology exchange-traded funds to make significant adjustments to their portfolios. The Technology Select Sector SPDR Fund (XLK) will need to acquire over $10 billion worth of Nvidia shares while cutting back on Apple. According to Matthew Bartolini, head of SPDR Americas Research, the rebalance will see Microsoft emerge as the top stock in the index, followed by Nvidia and then Apple.
The rebalance will result in dramatic changes in the weightings of these tech giants within the index. Without any caps in place, Microsoft, Nvidia, and Apple would all have weights above 20%. However, diversification rules limit how much cumulative weight stocks with at least a 5% share of the fund can have. As a result, Microsoft and Nvidia’s weights will hover around 21%, while Apple will see a significant drop to approximately 4.5%.
The impending shift in the XLK highlights how even passive index funds can diverge, especially when focusing on specific market segments. Understanding the nuances of how these funds are weighted, allocated, and how often they rebalance is crucial in deciphering the differences in exposures across various funds. Bartolini emphasizes the importance of looking beyond the label to truly understand a fund’s makeup.
The Technology Select Sector Index, which the XLK follows, uses a float-adjusted calculation to determine market cap. This adjustment accounts for large holders, such as Warren Buffett’s Berkshire Hathaway, who own significant stakes in individual companies like Apple. These controlled interests can impact a company’s free-float market capitalization, influencing its weighting in the index.
The rebalance, set to take effect at the end of the week, will be in effect for one quarter, regardless of how individual stocks perform in the interim. Even if Apple were to outperform Nvidia significantly before the official rebalance date, the new weightings will remain in place. This shift underscores the intricacies of index fund rebalancing and the impact it can have on individual stocks within the portfolio.
Nvidia’s rapid ascent has significant implications for technology exchange-traded funds, prompting a major rebalance that will see the chip giant take a more prominent position in the XLK. As the tech landscape continues to evolve, investors must stay attuned to these shifts in order to make informed decisions about their portfolios.