Goldman Sachs commented on the Nasdaq special adjustment: it is impossible to solve the problem of excessive market concentration
Starting next Monday, July 24, the Nasdaq 100 will undergo a special rebalancing, addressing the problem of excessive index concentration by redistributing weights.
Goldman Sachs believes that this correction is unlikely to solve the problems caused by excessive market concentration for many investors who track stock indexes, and that the Nasdaq 100 will still be too concentrated to be considered an actively managed diversified fund. The impact of rebalancing on affected stocks will also be limited.
The quarterly rebalancing of the Nasdaq 100 is designed to prevent any issuer's individual stock weighting more than 24% in the index, and preventing issuers with a weighting of more than 4.5% from accounting for more than 48% combined. In the June rebalancing review, no conditions for rebalancing were triggered. Microsoft, the highest-weighted component, has a weight of 12.8%, which is still well below the 24% threshold.
However, by July 3, each of the six largest Nasdaq 100 issuers was more than 4.5% for the week, with a combined weight of 51%.
Goldman Sachs estimates that from July 24, the combined weight of the current seven Nasdaq 100 constituents will be reduced to 44% from the current 56%.
Among them, NVIDIA and Microsoft will be the most affected, and the weights of these two stocks will be reduced by about 3 percentage points each. Apple's weight will be reduced from 12.1% to 11.5%, promoting the largest component, and Microsoft will be secondary, from 12.8% to 11.5%. The weighting of the NASDAQ constituents will be closer to the market capitalization level of the big blue chips.
The downward revision of the weights of the largest weighted stocks will be offset by the increase in the weights of the smaller weighted constituents, with Broadcom's largest increase in weight, which will increase from 2.4% to 3.0%.
Goldman Sachs estimates that the value of passive net selling funds in the market will exceed the average daily trading volume of Google's parent company Alphabet and more than one-third of the daily trading volume of Microsoft, Amazon and Nvidia due to the decline in the weight of heavy component stocks.
Goldman Sachs strategists expect earnings growth, valuations and the macro environment to drive returns on the Nasdaq 100 and its largest constituents over the next six months, rather than this particular rebalancing.
Last Monday, July 10, the first day after Nasdaq announced that it would adjust its weights, stock price action showed that investors had already made some advance trading for the adjustment. However, the sell-off in blue-chip technology stocks was short-lived. Since last Tuesday, the seven Nasdaq 100 components have returned an average of 5%, higher than the overall return of 3.5% for the Nasdaq 100.
Goldman Sachs noted that the index's previous outperform and weighting of the index's largest constituents has forced mutual funds to underweight these individual stocks, which in turn has hurt returns, with only 31% of large-cap funds above the benchmark this year.
The Nasdaq 100-based active mutual fund has only $10 billion in assets under management, far less than the $2 trillion that tracks the S&P 500 fund, and the Russell 2000's $805 billion fund.
Goldman Sachs believes that even if the Nasdaq 100 undergoes rebalancing, the combined weight of its constituent stocks with a weight of more than 5% will reach 32%, which will not meet the legal requirements for diversified actively managed funds.
The Investment Company Act, passed in 1940, states that so-called "diversified" funds should hold positions no more than 25% of their portfolios, and each position should not account for more than 5% of their portfolios.
As a result, many funds will not be able to preemptively adjust on Friday and will only be forced to act on the same day to ensure that their exposure matches the new weights of the Nasdaq 100.
Wells Fargo analysts last week argued that heavyweight index-tracking ETFs such as Invesco QQQ Trust will need to adjust their holdings accordingly after the rebalancing, but the rebalancing strategy itself is unlikely to have a profound impact on the future performance of the Nasdaq 100 index. Tech giants such as Apple, Microsoft, and Amazon will still dominate the index.