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S&P Rebalance – new fund rules

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S&P Rebalance – new fund rules

Hi guys, how will the new S&P fund rule system affect larger companies? Essentially, I hold a decent position in the Nasdaq, will Nvidia, apple and Microsoft get sold off to meet new rules? From what I can make out, it'll be out of one pocket into another, so the overall value will stay the same in the fund, and the Nasdaq overall. Is it limiting the 3 largest companies to 50% cap combined? If passive funds will now be capped, what do you think the portion is between active and passive institutional ownership is in the larger companies? For example 45% shares owned by passive / tracking funds, 30% active institutions and 25% private retail? Regards, Simon

Answer

Hi Simon,

Index-tracking stock funds with $350 billion in assets are due for a big revamp later this month, after S&P Dow Jones Indices retooled its rules to curb the dominance of the largest companies. With the equity market getting increasingly “top-heavy” in the era of Big Tech, S&P will now reduce the weightings of the market leaders in proportion to their capitalization — in the event they get even bigger and breach size-related thresholds in key industry benchmarks, it said in a statement this week.

Tech is the obvious current focus but the benchmark provider is introducing the new capping initiative across its sector indexes tracking everything from consumer staples to energy and communications.

  • passive investment vehicles like Technology Select Sector SPDR Fund will need to shuffle their holdings accordingly at their next quarterly rebalance.
  • The changes in the S&P’s capping methodology take effect at the market close on Sept. 20, Piper Sandler & Co. estimates $31 billion of trades will be unleashed across major ETFs, with roughly half of that coming from technology.

We believe the key factor here is this news has been in the market for a while and the likes of Nvidia (NVDA US) and Microsoft (MSFT US) have underperformed since July, it wouldn’t surprise us if they regain relative strength after the rebalancing. From a pure holdings perspective your ETF’s are likely to be tweaked away from the large AI names but we would be inclined to re-evaluate after the dust settles. It’s hard to know the actual levels of ownership from a strategy perspective.

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US NASDAQ 100 Index
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