Tech ETF Rebalance: Nvidia Sees $10B Buy-In, Apple's Weight Slashed

The colossal ETF with a scale of up to $71 billion—SPDR Fund (XLK), which tracks the largest ETF of technology stocks, will undergo a quarterly rebalancing this week to adjust equity weights.

Nvidia's recent stock price surge will cause the ETF to purchase a substantial amount of Nvidia shares, exceeding $10 billion, while selling off Apple, with a scale of about $11 billion.

Matthew Bartolini, the Head of SPDR Americas Research, recently stated:

New calculations show that Microsoft is the top stock in the index, followed by Nvidia, and then Apple.

If there were no caps, the weights of Microsoft, Nvidia, and Apple in the index would all exceed 20%.

However, the index's diversification rules limit the total weight of stocks that account for at least 5% of the weight. As a result, the weights of Microsoft and Nvidia may be around 21%, while Apple's weight will drop to approximately 4.5%.

Note from Wall Street Journal: According to the regulatory-based S&P Dow Jones Index method, individual stock weights must not exceed 24%, and the combined weight of companies that account for 4.8% or more must not exceed 50%.

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If the total weight of the largest stocks exceeds the cumulative weight cap, the weight of the smallest company among them will be systematically reduced until the cap is met, and the excess weight will be allocated to other smaller companies in the index.

The aforementioned latest weight settings of XLK significantly differ from the previous weight distribution, which kept Nvidia's weight at a lower level: as of June 14, both Microsoft and Apple had a weight of about 22% in the ETF, while Nvidia was at 6%.

Based on the $71 billion in assets managed by XLK, a 15 percentage point change in this ETF equates to over $10 billion in funds.Analysis indicates that such a significant shift in index funds is not common, but it is not unprecedented. Bartolini previously stated that there have been rebalancings around changes in industry classifications, such as Amazon being moved to the non-essential consumer goods category. If SPDR is forced to make a rather significant trade, he believes it is capable of handling it.

The rebalancing of XLK will be based on the adjusted market capitalization of last Friday's closing price. The rebalancing will officially take effect this weekend. SPDR will not comment on specific trading strategies related to the rebalancing.

In fact, as of last Thursday's close, the market capitalizations of these three tech giants were almost equal, adding a bit of excitement to the usually mundane stock trading process.

Before the U.S. stock market opened last Friday, any of the three companies could have become the largest publicly traded company by market capitalization at the close.

Complicating the entire process is that the final market capitalization numbers used in the rebalancing may differ slightly from those reported by financial media organizations.

S&P Dow Jones Index uses an indicator called the float-adjusted market capitalization to determine how much of a company's outstanding shares are included when calculating the rebalancing weights.

A document released by SPDR states that it does not include shares held by long-term strategic shareholders, such as company executives, asset management companies, and insurance companies with board seats, as well as shares held by other publicly traded companies.

The rebalancing of XLK comes at a time when its gains are far behind the widely cited benchmark: the S&P 500 Information Technology Index, which is not directly tracked by any investment fund. The index has risen by about 34% this year, while XLK's gains during the same period have only been about 23%. The surge in Nvidia's stock is the biggest reason for this gap.

Once the rebalancing is determined, hedge funds and market arbitrageurs may rush to buy or sell the stocks of affected companies, a process known as "front-running." This could adversely affect stock prices as the ETF prepares to make adjustments. Previous academic papers have stated that front-running behavior causes price distortions, profiting at the expense of ETF investors.