Nvidia’s rapid rise in the stock market has forced the Technology Select Sector SPDR Fund (XLK) to rebalance its portfolio. The fund, which has $71 billion in assets under management, will have to acquire more than $10 billion worth of Nvidia shares while dumping Apple. This change is due to Nvidia surpassing Apple in market cap value, with Microsoft now leading the index, followed by Nvidia and then Apple.
If not for diversification rules in place for the index, Microsoft, Nvidia, and Apple would have weights above 20%. However, rules limit the cumulative weight of stocks with at least a 5% share of the fund. As a result, Microsoft and Nvidia are likely to have weights of around 21% each, while Apple will see its weight drop to about 4.5%. This is a significant shift from the previous weightings, where Nvidia’s weight was kept artificially low by index rules.
The competition for the top spots in the index came down to the wire, with all three companies having market caps over $3.2 trillion and within a close range of each other. The rebalance will result in substantial changes to the fund, with a 15-percentage-point change equating to more than $10 billion due to the fund’s large asset size. SPDR, the company behind the XLK, does not comment on specific trading strategies around rebalances.
The XLK follows the Technology Select Sector Index from S&P Dow Jones Indices, which uses a float-adjusted calculation to determine market cap. The new rebalance is set to take effect at the end of the week, with Nvidia’s increased weight in the index reflecting its tremendous growth in the market. This change highlights the ever-evolving nature of the stock market and the need for funds to adapt to ensure optimal performance and adherence to diversification rules.
Overall, Nvidia’s surge in the market has had ripple effects on the XLK fund, leading to a significant rebalance that will see the tech giant’s share price increase while Apple’s decreases. This adjustment underscores the importance of following index rules and maintaining diversification in funds to mitigate risks and capitalize on market opportunities. The ongoing competition between tech giants for top positions in the index exemplifies the dynamic nature of the stock market and the need for investors to stay informed and adaptable in their strategies.
