(Bloomberg) — Three of the world’s biggest companies have had their influence reduced in the Nasdaq 100 Index after the giant technology rally of 2024 swelled them to unprecedented size.
Tesla Inc., ( TSLA ) Meta Platforms Inc. ( META ) and Broadcom ( AVGO ) Inc. all saw their share of the benchmark fall in an annual rebalancing. Apple Inc., Nvidia Corp., Microsoft Corp. and Alphabet Inc. each came out of the annual process with larger weights, according to data compiled by Bloomberg.
It’s the second time in a about a year that overseers have tweaked the index’s allocation to its biggest members, a cohort roughly synonymous with the Magnificent Seven stocks whose unstoppable appreciation has been a huge market story. Rules intended to keep too few companies from exacting too great an influence in equity gauges have gotten a workout the last few years due to the mostly artificial-intelligence fueled advance.
The Nasdaq 100 is weighted roughly according to its members’ relative market caps. But it’s also governed by several provisions that can kick in when a few companies get too big. One triggers when all the constituents making up more than 4.5% of the benchmark, respectively, together add up to 48% or more. That happened first in mid-2023, requiring a reweighting then — and again recently, after Broadcom surged enough to push it over the 4.5% threshold.
Nasdaq’s rules for how to carry out a megacap cull are complex and open to interpretation. But this latest reshuffle may have been governed by a rule that allows overseers to reset the weighting of the five biggest companies to just under 40% and adjust the others accordingly. A Nasdaq spokesperson declined to comment on specifics and pointed to methodologies posted on the exchange-operator’s website.
“It’s very technical,” said Steve Sosnick, chief strategist at Interactive Brokers. “In some ways, the Nasdaq 100 has to do this because it’s a victim of its own success because the biggest stocks in the index have grown so dramatically relative to the rest of the index.”
Megacap tech stocks surged this year as advancements around artificial intelligence helped propel shares. More recently, Broadcom — which is a chip supplier for Apple and other big-tech firms — skyrocketed to a $1 trillion market valuation on the back of projections that it will see a boom in demand for its products. Tesla also surged some 75% in the wake of the US presidential election.
Within the Nasdaq 100, Apple’s weighting rose to 9.8% from 9.2% on Friday, while Nvidia’s went up to 8.4% from 7.9%. Microsoft’s and Amazon.com Inc.’s also went up, while Alphabet’s increased a smidgen. Broadcom’s fell to 4.4% from 6.3%, Tesla’s dropped to 3.9% from 4.9%, and Meta’s to 3.3% from 4.9%, according to the data.
More than 200 exchange-traded products with some $540 billion in assets follow the Nasdaq 100 or one of its variations globally, an analysis by Bloomberg Intelligence show. The Invesco QQQ Trust Series 1 (ticker QQQ) and the Invesco NASDAQ 100 ETF (QQQM), for instance, track the Nasdaq 100 and have had to tweak their holdings to comport with the new changes, meaning that they will be maintaining lower weights for the stocks whose weightings went down, and vice versa, says BI’s Athanasios Psarofagis.
“This shows the growing influence of index providers on market dynamics,” Psarofagis said. “It’s always been important to be included in an index and I feel that the importance of index inclusion has grown over the last couple of years, thanks, in part, to money moving into ETFs and passive vehicles.”
—With assistance from Lu Wang and Emily Graffeo.
