A Major Shake Up Is Coming For The Nasdaq 100

Something that's only happened one other time will be occurring again last this month. Nasdaq announced that on July 24th, they will be doing a special rebalance of the Nasdaq 100. This won't change the securities within the index, but rebalancing the weightings of each constituent after the index has become 'unbalanced'.

Nasdaq said that in 2010 they studied the concept of doing special rebalances and the only other time one has been done was in 2011, not giving us a lot of sample size to work with to evaluate the implications of the action. On the chart below I've plotted blue lines when the special rebalance was announced and then initiated. Again, this is a sample size of 1 so we can't put too much weight on it, but we did see a temporary negative reaction to the Index. I'd also note there were many other developments taking place in the summer of 2011, so it wasn't necessarily all a result of this rebalance that caused stocks to pull back.

What about the reaction to the stocks impacted by the special rebalance? The biggest change in 2011 was a reduction in Apple AAPL after its strong performance. QCOM QCOM and SBUX SBUX also saw declines (and many others but they were very minor) in their weightings. Meanwhile, MSFT MSFT, ORCL ORCL, INTC INTC, and GOOGL GOOGL saw the largest increases.

Below we can see the performance of both groups. The performance shown begins on the announcement date, with a black line showing when the change was initiated in May '11. Apple saw a decline of about 6% before rallying back. Interestingly, the stocks that saw their index weight increase, actually saw a larger negative reaction.

The recent dip in U.S. equities could be a result of some frontrunning ahead of this rebalance. While Nasdaq hasn't sited the specific changes, it's not hard to imagine that it'll be the Magnificent 7 (AAPL, NVDA NVDA, MSFT MSFT, TSLA TSLA, META META, GOOGL, AMZN AMZN) that get put on the chopping block. This could be a positive for the market, making the Index a little less reliant on such a heavy weighting in a few names. We'll see in the coming weeks how traders digest the change.

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