ETFs
Here’s what you need to know about the Tech ETF XLK shakeup
THE Selected Technology Sector SPDR Funds XLK, the second largest ETF in the industry, is set to undergo a major rebalancing this week. This shakeup will increase exposure to NVIDIA Corp. NVDA to the detriment of Apple Inc. AAPL.
A major change
This change comes as NVIDIA experiences a relentless rally, driven by its importance in the field of artificial intelligence (AI). The stock has surged 164% so far this year and surpassed Apple in market value earlier this month. If NVIDIA maintains its position as the world’s second largest company by the end of this week, then XLK will increase its stake in NVIDIA stock to over 20% and reduce its stake in Apple stock to just 4.5%. This change will create a $10 billion deal to buy NVIDIA stock and a roughly $11 billion deal to sell Apple stock, according to Bloomberg (read: NVIDIA Overtakes Apple: ETFs to Tap Incredible Growth Story ).
Currently, the XLK ETF is heavily focused on its top holdings, including Microsoft, Apple, and NVIDIA. As of June 11, 2024, Microsoft held 22.4% weight in the ETF, Apple 22.1%, and NVIDIA 5.7%. Notably, all three stocks are worth more than $3 trillion amid a continuing AI boom. Due to concentration limits, the fund must ensure that the sum of companies with a weight greater than 4.8% does not exceed 50% of its total assets.
Concentration limits have weighed down XLK’s performance in recent months despite the meteoric rise in NVIDIA stock. In fact, XLK underperformed the S&P 500 Information Technology Index, which has a 21% NVDA weighting, by 5 percentage points between April and June, the widest margin since 2001 (read: Face-off between technology ETFs: Apple vs. Microsoft).
XLK tracks the Technology Select Sector Index, which is technically not a market cap-weighted index but a “modified” market-cap-weighted index. This generally means that it can impose certain caps or guidelines around the portfolio weighting methodology to address potential problems, such as excessive concentration.
Although NVIDIA and Apple will swap places in the XLK portfolio, the number of stocks will remain at 65. On the industry side, the ETF currently has the largest allocation in software, semiconductors and semiconductor equipment. drivers, as well as technology hardware, storage and peripherals. The fund has $71.1 billion in assets under management and charges 9 basis points in annual fees.
The new XLK offers growth opportunities
This move will provide a huge boost to XLK, capitalizing on NVIDIA’s AI-powered rise. The fund will continue to benefit from strong sector fundamentals. The expansion of AI applications promises to unlock new growth opportunities within the sector. According to a new report from Grand View Research, the global artificial intelligence market is expected to witness a CAGR (2024-2030) of 36.6% to reach $811.75 billion by 2030 (read: Here’s why ETFs technologies will continue to rise).
The Fed, at its last meeting, forecast one rate cut for this year and plans four cuts in 2025. The central bank changed the language of its statement, noting that there has been “further modest progress toward committee’s 2% inflation target. .” Previously, the statement had highlighted a “lack” of further progress. This heralds a period of higher interest rates for a while. Tech titans have shown strong resilience in the face of such a scenario. And when the Fed begins cutting rates later this year, tech stocks will get a boost. Since the technology sector relies on borrowing to achieve higher growth, it is cheaper to borrow more money for new initiatives when interest rates are low.
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Apple Inc. (AAPL): Free Stock Analysis Report
NVIDIA Corporation (NVDA): Free Stock Analysis Report
Technology Select Sector SPDR ETF (XLK): ETF Research Reports