Nvidia Gains 20% Weighting in Major Tech ETF as Apple Sees Sharp Reduction

Infotrading.io - In a significant shakeup within the Technology Select Sector SPDR Fund (XLK), Nvidia is set to receive a 20% weighting, driven by its blistering rally. This adjustment is expected to generate over $10 billion in investor demand for Nvidia shares, while Apple will see a sharp reduction in its weighting within the same ETF.

Key Details of the Rebalance

Matthew Bartolini, head of SPDR Americas Research, has outlined the changes resulting from the upcoming rebalance. The adjusted market cap values, based on the latest calculations, place Microsoft at the top of the index, followed closely by Nvidia, and then Apple.

Current and Adjusted Weightings:

• Microsoft: Approximately 21%

• Nvidia: Approximately 21%

• Apple: Reduced to about 4.5%
  

This marks a significant change from the prior weightings as of June 14, where Microsoft and Apple each held approximately 22% of the fund, while Nvidia's weight was limited to just 6% due to index rules.

Impact on the Technology Select Sector SPDR Fund (XLK)

The XLK, which manages about $71 billion in assets, will see a major shift due to the rebalancing. A 15-percentage-point change translates to more than $10 billion in assets being reallocated. The rebalance will officially take effect at the end of this week and will remain in effect for one quarter, even if Apple outperforms Nvidia significantly in the interim.

The Significance of Free-Float Adjustment

The index that XLK follows, the Technology Select Sector Index from S&P Dow Jones Indices, uses a float-adjusted calculation to determine market cap. This adjustment considers large holders of individual stocks who are unlikely to trade daily. For example, Warren Buffett’s Berkshire Hathaway owns more than 5% of Apple, which impacts its free-float market capitalization negatively.

Bartolini explained, “Its free-float market capitalization is reduced because you have so many controlled interests in the company.”

The Broader Implications

The substantial shift in the XLK’s composition underscores the volatility and dynamic nature of even passive index funds, particularly those focusing on narrow market segments. Bartolini emphasized the importance of understanding how these funds are weighted and allocated, as it can lead to significant differences in exposures from one fund to another.

“Understanding how they might be weighted, where they’re allocated, what the rebalance frequency is, is really important because it can create differences in exposures and make what’s beneath the label seem different from fund to fund,” Bartolini said.

Market Reactions and Outlook

On the day of the announcement, Apple shares rose by 2%, while Nvidia experienced a slight dip of 0.7%. The market’s reaction reflects the anticipation of the significant reallocation of assets within the XLK.

Nvidia's significant increase in weighting within the Technology Select Sector SPDR Fund highlights the dynamic changes in the tech sector and the influence of market cap adjustments. This rebalancing, driven by Nvidia's strong performance, not only alters the fund's composition but also signals a shift in investor focus within the tech industry. As these changes take effect, the impact on the ETF’s performance and the broader market will be closely watched by investors.