Nasdaq-100 Makeover
Special Revamp of the Nasdaq-100 Index
The Nasdaq-100 is an index thriving on the backbone of the Big-Tech boom, seeing a YTD return of 44.65%. Yes, 44.65%, not 4.465%. To put that into context, if you had invested $100 on January 1, 2023 in the Nasdaq-100 and in a 10-year US Treasury Bond you would have made over 10x more money from the Nasdaq.
This is evident from the composition at the top of the index:
1. MSFT - 12.8% 2. AAPL - 12.1% 3. NVDA - 7.3% 4. AMZN - 6.9% 5. TSLA - 4.5% 6. META - 4.4%
With the top 6 companies comprising almost 50% of the total index, an announcement on July 7, 2023 was imminent of a breach in concentration levels set by the SEC.
Constituents with weights over 4.5% cannot collectively make up over 48% of the index
The change is dubbed a “special revamp” of the Nasdaq: shares of the top tickers will be reduced and distributed to other members of the index.
Wells Fargo researchers estimate the following stocks will see their weight increase:
Starbucks (SBUX)
Mondelez (MBUX)
Booking Holdings (BKNG)
Gildead Sciences (GILD)
Intuitive Surgical (ISRG)
Analog Devices (ADI)
Automatic Data Processing (ADP)
These are the stocks to watch on July 24, 2023. Portfolio managers holding shares of the Nasdaq-100 will be required to hold larger positions in these companies, with potential for price rises.
Front-running is the idea that high-frequency investors will be able to pick up profits on expected price differentials compared to more passive funds.
Passive funds are heavy investors in Nasdaq ETFs, with an estimated $251bn in passive mutual funds benchmarked to the NDX (Nasdaq). These passive funds may be outperformed in terms of speed by active investors.
As the share of big-tech companies falls, it is reasonable to assume the stock price will also follow suit. And the market price of companies expecting a rise in weight should rise, as portfolio managers are required to put more money towards them.
However, there has been little evidence of this price differential mounting into something substantial.
Big-tech companies are liquid giants. The amount of liquidity traded each day means that small expected price differentials have had little effect on any suggested underperformance. In fact, these companies have beaten all conventional wisdom and outperformed last week.
This speaks to the resounding confidence investors have in these tech monsters, and the “special revamp” is testament to their success.
Nevertheless, we expect some activity on market open July 24, 2023. We expect a small price in big-tech and we watch for the companies listed above, outlined by Wells Fargo.
The shift in asset allocation for portfolio managers does lead to some further thought about the makeup of indices, however there may be a silver lining in that it offers a chance for diversification. Being very tech-headed, the revamp will put some weight in alternative sectors.
So it seems the big-tech companies will brush-off any adversity. Smaller companies may improve due to the revamp. So does anyone lose? Well, it would be that $251bn passively invested in the NDX who may lose out to HFT firms grabbing up minute profits.