ETFs
Major tech ETF expected to take on Nvidia at Apple’s expense
What is happening here?
The Technology Select Sector SPDR fund (ticker: XLK) – one of the world’s largest technology funds AND F – looks together to load on Nvidia.
What does that mean?
XLK is designed to passively track an index made up of tech companies in the S&P 500. But clearly, the fund leaves some room for artistic license: while Nvidia makes up 22% of the S&P tech index, it only makes up 6%. of the ETF. . You see, the old diversification rules mean that the combined weight of the largest companies – those that make up more than 5% of the diversified fund – cannot exceed 50%. The problem is that Microsoft, Nvidia and Apple each make up more than 20% of the S&P technology index. The solution chosen by XLK means that the fund mimics the weight of the two largest stocks, while ensuring that the third does not exceed the limit. So now that Nvidia has overtaken Apple as the world’s second-largest technology company, XLK is expected to triple the chipmaker’s weight in its quarterly rebalance later this month.
Why should I care?
For the markets: Let’s talk numbers.
XLK will increase Nvidia’s weight from 6% to 21%, while Apple’s weight will be reduced from 22% to 5%. The change would mean State Street, the ETF’s manager, would have to buy $11 billion worth of Nvidia stock and sell $12 billion worth of Apple stock. It’s a major spring cleaning: Apple’s sale alone is the company’s average daily market value over the past three months.
The big picture: This is not a copy and paste.
Passive index funds are supposed to track a benchmark, but this shakeup is an extreme example of how far they can deviate. Also keep in mind that reducing XLK’s Nvidia allocation means its investors haven’t benefited from the full effect of the chipmaker’s dramatic rise. In fact, XLK is trailing the S&P Technology Index by five percentage points this quarter – the widest gap since 2001.
