No. of Recommendations: 5
After the close Friday, the XLK ETF will be rebalanced to drop Apple's 22% share down to 4.5% and increase Nvidia's 5.9% share up to 21.1%, based on Bloomberg estimates.
Good thing they only readjust every trimester, because after a 3% drop today, NVDA is back down to #3... It would be funny if Standard and Poor's had to buy and sell $20b worth of stock every trimester to respect this crazy rule, with the top 3 (now MSFT, AAPL, NVDA in that order,) currently at $3.3t-$3.2t-$3.1t, respectively.
Weighting. Each index is capped market capitalization weighted. For capping purposes, the indices are rebalanced quarterly after the close of business on the third Friday of March, June, September, and December using the following procedures:
1. The rebalancing reference date is the second Friday of March, June, September, and December.
2. With prices reflected on the rebalancing reference date, adjusted for any applicable corporate actions, and membership, shares outstanding and IWFs as of the rebalancing effective date, each company is weighted by FMC. Modifications are made as defined below.
3. If any company has an FMC weight greater than 24%, the company’s weight is capped at 23%, which allows for a 2% buffer. This buffer is meant to mitigate against any company exceeding 25% as of the quarter-end diversification requirement date.
So if the markets close in 2 hours, with the 3 big companies still in the current order (MSFT, AAPL, NVDA), it would be ironic that they would be selling and buying all those $24b worth of shares to get AAPL down to 5% and NVDA up to 23%, even though AAPL is back to #2 and NVDA is back to #3.
6. The sum of the companies with weights greater than 4.8% cannot exceed 50% of the total index weight. These caps are set to allow for a buffer below the 5% limit.
If they don't want companies with weights greater than 4.8% totalling to more than 50% of the total weight, it's because they think a 5% weight is too big, so they certainly shouldn't want 2 companies with 22% each (MSFT and AAPL). But they will not achieve that result at all by just switching out AAPL for NVDA. It is ironic that they will be doing all this buying and selling and will still end with 2 companies that add up to 43%, and in fact, by the time they do it, they will have just put the #3, and by far the most volatile of the 3, into a 21% stake, with MSFT staying at 22%! And if they don't want 10 companies with 5% each representing half the index (which would require an adjustment, under their rules, it would be simple to do so, without much buying or selling each trimester, by just capping the weight of any company at a lower number, like 4% or 3%.
dtb
