Friday trading could spark $10 billion surge in demand for Nvidia stock | Wilnesh News
key point
- The Technology Select Sector SPDR Fund (XLK) is about to be rebalanced based on Friday’s market capitalization.
- Apple and Microsoft are the two companies currently held by the fund, with each holding about 22%.
- Nvidia’s market share is less than 6%, although its market capitalization is only slightly behind the two leaders.
Friday’s battle among the U.S. market’s largest stocks takes on particular importance as Nvidia closes the week on a strong note that could lead to a dramatic shift in the $70 billion fund. One of the top two stocks in jeopardy is the Technology Select Sector SPDR Fund (XLK), whose June rebalancing is based on market capitalization as of Friday’s close. Apple and Microsoft are the two companies with the largest holdings of the fund, each holding about 22%. Nvidia’s market share is less than 6%, although its market capitalization is only slightly behind the two leaders. The rules used by S&P Dow Jones Indices suggest a similar gap is likely to reoccur during this quarter’s adjustment, and the race to finish in the top two looks set to continue until the final day. As of Thursday’s close, Microsoft, Apple and Nvidia all had market values within $100 billion, according to FactSet calculations. The index that XLK follows uses float-adjusted market cap to make decisions, so traders may need to wait for an official call from S&P Dow Jones Indices to finalize their orders. UBS’s June 12 report predicted that if Nvidia climbed to second place and surpassed Apple to third place, it could cause the chipmaker’s weighting in the fund to jump. to 21%, while Apple’s weighting will drop to 4.5%. A 15-percentage point swing in Nvidia’s weighting would mean the fund would need to acquire more than $10 billion worth of stock in the chipmaker — all on or very close to June 21, the rebalancing date. For context, Nvidia’s total trading volume was approximately $50 billion on Friday, June 7, according to FactSet. Such major shifts in index funds are uncommon, but not unprecedented. Matthew Bartolini, head of SPDR Americas research, pointed to the rebalancing around industry classification changes, such as when Amazon was moved into the consumer discretionary category. “If we are forced to do a fairly large transaction, I think we are well-positioned to handle these issues,” Bartolini said. How it works The current gap between Nvidia and Apple is driven by the sheer size of a handful of tech stocks and the funds that manage the fund. caused by diversity rules. The fund tracks an index from S&P Dow Jones Indices that uses weight caps to maintain the index’s range. These include a weight limit of 23% for the largest stock and a cumulative weight limit of 50% for all stocks exceeding 4.8%. So if two tech giants each make up more than 20% of the index, the third stock would have to trade well below its relative market cap. State Street and other fund issuers will have a week to prepare for the index changes. Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital, said the ETF works with banks to buy and sell large volumes of shares around rebalancing. Sometimes these movements manifest themselves as significant inflows and outflows, known as “heartbeat trading.” Bartolini said SPDR would not comment on trading strategies regarding rebalancing. Bajaj said professional traders sometimes pre-position or pre-empt such major changes to take advantage of imbalanced demand, although this practice has declined over time. “The closing has become so efficient now. Depending on how much Nvidia stock is needed, this could lead to a short-term spike in the name,” Bajaj said. SPDR isn’t the only fund family that directly or indirectly tracks the S&P Dow Jones Index, and industry funds aren’t the only ones rebalancing this month. This could mean changes in other products could help offset any significant changes to XLK. Concentration Risk The potential shakeout in XLK is a mechanical example of some of the problems caused by the historical overweighting of a small number of companies in equity portfolios. In this market rally that began in late 2022, some investors and market strategists have been concerned about the weighting of the so-called “Magnificent 7” stocks. According to a June 11 report from Strategas ETF strategist Todd Sohn, Nvidia, Apple and Microsoft each account for more than 6% of the entire S&P 500 index, with Nvidia accounting for 35% of the index’s year-to-date gains. In its mid-year ETF outlook, State Street Global Advisors recommended investors look at weighted strategies such as the SPDR NYSE Technology ETF (XNTK) to eliminate some of the risk in these stocks. “Taking a more equally weighted position in technology and communications services and consumer discretionary stocks that are at the forefront of artificial intelligence may actually help balance those concentration risks while still allowing you to participate in the theme,” Bartolini said. —CNBC’s Michael Bloom contributed reporting.