ETFs
Big $71B ETF Shakeup Looms as Nvidia Overtakes Apple
(Bloomberg) — One of the world’s largest technology ETFs appears poised for a significant rebalancing that would increase exposure to Nvidia Corp. at the expense of Apple Inc. – generating billions of dollars in trading volume in one fell swoop.
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Barring an 11-hour deviation from the methodology set by index provider S&P Dow Jones Indices, State Street Global Advisors is set to revamp the makeup of its $71 billion SPDR Technology Select Sector fund (ticker XLK) after Nvidia’s market value closed above Apple. Friday.
For months, XLK has held significantly fewer Nvidia shares, even as the AI giant has soared 166% year to date. When the chipmaker ranked third, it accounted for about 6% of the ETF’s assets, compared to 22% in the S&P 500 Information Technology Index. The ownership cap, imposed under the diversification rules, has led to massive underperformance of XLK this year.
Although S&P theoretically reserves the right to make an exception, industry participants say the ETF is in line for a shakeup when it enacts the quarterly rebalancing near the end of June.
On this basis, Apple and Nvidia are expected to reverse their positions in the ETF, with the former’s weighting falling to 4.5% and the latter’s exceeding 20%, according to calculations sent by the index provider to three market participants familiar with the subject.
State Street is expected to buy $11 billion worth of Nvidia stock and dump Apple for $12 billion, according to one estimate. This is not trivial: the planned sale of Apple shares is equal to the average daily value of transactions over the last three months.
“By our calculations, the about-face between Nvidia and Apple will happen,” said Chris Harvey, head of equity strategy at Wells Fargo Securities. “This more closely aligns the XLK ETF with momentum trading and semis. At the margin, it’s more money chasing a stock that doesn’t need additional help.
An S&P spokesperson declined to comment on potential changes to the index and referred Bloomberg News to the methodology.
Matt Bartolini, head of SPDR Americas Research at State Street, said XLK will rebalance in accordance with its rules and methodology. The ETF is required to track the S&P benchmark designed to remain compliant with diversification regulations.
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The rules “have served investors well,” he said.
S&P has left the door open for an exception when it reveals sector weightings at the end of the month, judging by a document sent late last week and seen by Bloomberg News.
The index committee “reserves the right to make exceptions when applying the methodology if the need arises,” S&P wrote in a note regarding the June rebalancing. “In any scenario where processing differs from the general rules set out in this document or in additional documents, customers will be informed, where possible.”
S&P said it would send so-called pro forma documents relating to the rebalancing of sector indexes to clients every day through Friday.
Any last-minute deviations from the public methodology would not be well received by traders, who tend to take positions in anticipation of possible revisions to index rebalances like this. As it becomes more and more popular, buying stocks that enter the major indexes and selling those that fall out has become one of the most reliable strategies for the world of hedge funds.
Underpinning the duo’s massive adjustments to the ETF’s weightings are more than 80-year-old diversification rules that were established to protect investors from concentrated bets. Under these rules, the combined representation of the largest companies – those that make up approximately 5% or more of a diversified fund – cannot exceed 50%.
Similar restrictions prompted the Nasdaq 100 supervisor last year to conduct a special rebalancing to keep index funds in compliance with the rules. When this rule is not followed, indexes such as the Nasdaq 100 tend to undercut major stocks proportionately. XLK’s methodology works differently. When a certain number of titles do not comply, the smallest of them is truncated.
This unique rule is why Nvidia has been massively underowned by XLK, leading the fund to trail the traditional S&P 500 technology subindex by more than 5 percentage points this quarter – the widest dispersion since 2001 .
As the semiconductor pioneer has caught up with Apple and Microsoft Corp. Over the past few weeks, XLK’s upcoming rebalances have sparked interest on Wall Street given the prospect of volatility-inducing weight additions and reductions for some of the world’s most closely watched tech companies.
“I’m curious to see if they’ll keep the rules the same in the next rebalancing in September,” said James Seyffart, ETF analyst at Bloomberg Intelligence. “If Apple manages to overtake Nvidia or Microsoft by the next rebalancing benchmark date – which is September 13 – we could have a massive mirrored rebalance where Apple is bought for billions and Nvidia or Apple is sold for billions. of billions. »
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