Nasdaq 100 special rebalance is unlikely to solve the concentration problem – Goldman Sachs
© Shutterstock Nasdaq 100 (NDX) special rebalance is unlikely to solve the concentration problem – Goldman Sachs
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Goldman Sachs strategists weighed in on the upcoming Nasdaq 100 ‘Special Rebalance”, aimed at tackling the index’s high level of concentration among seven big tech stocks.
The event will take place on July 24 with the weight of the largest 7 stocks in the index expected to drop by 12% (56% to 44%). Still, Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) will remain the largest constituents.
Overall, the Info Tech sector will continue to account for roughly half of the Nasdaq 100 index.
“We estimate that declining weights will drive passive net selling worth more than a day’s average trading volume in GOOGL and more than one-third of a day’s volume in MSFT, AMZN, and NVDA,” strategists said in a client note.
Still, strategists argue that the special rebalance “will have a limited impact on the affected stocks.” Goldman Sachs expects Broadcom’s (NASDAQ:AVGO) index weight to increase the most (from 2.4% to 3.0%).
“In 2011, Nasdaq slashed the NDX weight of AAPL from 20% to 12%, but this change had no clear negative effect on the stock’s performance. Likewise, there was no clear impact on MSFT despite its index weight rising by nearly 5 pp to 8% following the rebalance. In fact, MSFT lagged AAPL during the weeks around the rebalance.”
In this context, strategists don’t believe that the upcoming event will “solve the challenge that elevated current market concentration poses for many benchmarked investors.”
“Even after the rebalance, the NDX will remain too concentrated to be considered an actively managed “diversified” fund according to the SEC (stocks greater than 5% weight will total 32% of the index),” they concluded.
