NASDAQ 100 index to be rebalanced in favor of smaller companies

NASDAQ, the US high-tech stock exchange, is conducting a “special rebalancing” of the NASDAQ 100 index due to a sharp increase in quotes and the combined share of seven tech giants. The changes are provided for by the requirements of regulators and the rules of the exchange itself to avoid excessive influence of the largest companies on the dynamics of the entire index.

“Special Rebalancing” will come into force on July 24, and details of the change in the calculation of the index will be published the day after tomorrow, July 14. In recent months, the share of the capitalization of the Big Seven (Microsoft, Apple, Nvidia, Amazon, Tesla, Meta Platforms, which is recognized as extremist in the Russian Federation and banned, and Alphabet) in the total capitalization of the NASDAQ 100 index companies has reached 55%. This began to contradict the requirements of regulators, the US Securities and Exchange Commission (SEC) and NASDAQ’s own rules on the need for diversification – so that the quotes of one or several very large companies do not have an overwhelming effect on the entire index and do not distort the real picture in the industry.

The growth in the share of the largest companies in the NASDAQ 100 index was largely due to a sharp increase in their quotations. During the COVID-19 pandemic, the shares of all the leading technology companies have risen in price, and in recent months Tesla has experienced a real surge – since May, shares have risen by 60%, which led the entire index, and the share of the “big seven” exceeded 48%. These events forced Wells Fargo analysts the day before speak that the NASDAQ 100 index could be rebalanced.

In accordance with SEC requirements and NASDAQ rules, a rebalancing can occur at any time if the combined capitalization of large companies exceeds a share of 48% of the total capitalization of all companies included in the NASDAQ 100 index.

Large companies are those whose capitalization individually is at least 4.5% of the total capitalization of the companies in the index. Now there are seven such companies, Microsoft has the largest share – 12.9%.

According to Cameron Lilja, head of NASDAQ’s index products and operations, the exchange has already rebalanced twice – in 1998 and 2011. According to NASDAQ rules, when rebalancing, the total share of large companies in the calculation of the entire index should be reduced to 40% or less. According to unofficial media reports, now the share will be reduced to 37-38%.

Evgeniy Khvostik