The Nvidia Corporation logo is seen at the annual Computer Showcase in Taipei, Taiwan, May 30, 2017.
Xiao Tailong | Reuters
NvidiaStrong gains will force a big tech exchange-traded fund to buy more than $10 billion worth of stock in the chip giant while slashing capital commitments apple.
The index indicates Technology Select Sector SPDR Fund (XLK) This will soon be followed by rebalancing based on adjusted market capitalization after Friday’s close. The new calculation results are displayed Microsoft Matthew Bartolini, director of Americas research at SPDR, said the stock is the top-ranked stock in the index, followed by Nvidia and then Apple.
Without a cap, all three stocks would have a weight of more than 20% in the index. But the index’s diversification rules limit the fund’s cumulative weighting to stocks with shares of at least 5%.
Bartolini said that as a result, Microsoft and Nvidia’s weight may reach about 21%, while Apple’s weight will drop significantly to about 4.5%.
This is a change from the previous weighting, which artificially weighed Nvidia down based on index rules. As of June 14, Microsoft and Apple each held about 22% of the fund’s shares, while Nvidia only held 6%.
XLK exchange
| company | Portfolio weights as of 6/14 | Estimated weight after rebalancing |
|---|---|---|
| Microsoft | twenty two% | twenty one% |
| Nvidia | 6% | twenty one% |
| apple | twenty two% | 4.5% |
source: SPDR
The race for the top two spots entered the final day. As of Monday, FactSet’s market capitalization data showed that all three companies were worth more than $3.2 trillion, within $50 million of each other, although that number differs slightly from the calculation used in the index.
XLK manages about $71 billion in assets, so a 15% change in the fund would equate to more than $10 billion. SPDR does not comment on specific trading strategies regarding rebalancing.
XLK’s huge shift is an extreme example of how even passive index funds can diverge, especially when focusing on narrow parts of the market.
“It’s important to understand how they’re weighted, where they’re allocated, and how often they’re rebalanced, because it can create differences in exposure and make what’s under the label look different from fund to fund,” Bartolini said.
The fund follows S&P Dow Jones Indices’ Technology Select Sector Index, which uses a float-adjusted calculation to determine market capitalization. The rebalancing will officially take effect this weekend.
The free float adjustment to market capitalization takes into account large individual shareholders of a stock who are less likely to trade on a daily basis. Bartolini said Warren Buffett’s Berkshire Hathaway, for example, owns more than 5% of Apple Inc., which could gain a spot in the index.
“Its free-float market value decreases because you have too much controlling interest in the company,” Bartolini said.
Even if Apple significantly outperforms Nvidia earlier than the official date, the rebalancing will continue for a quarter.
On Monday, Apple shares rose 2%, while Nvidia shares fell 0.7%.
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