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NASDAQ 100’s special rebalance On 24 July, the NASDAQ 100 Index conducted a special rebalance to reduce the concentration of the so-called ‘magnificent seven’ in the index. The seven stocks whose strong performance this year has driven the index are Apple, Amazon, Microsoft, Alphabet, Tesla, Nvidia, and Meta. The index is typically reconstituted annually in December, with additional rebalancing opportunities each quarter. A special rebalance outside the usual schedule is only happening for the third time in the index’s history, with the first two having been in December 1998 and May 2011. According to NASDAQ, a special rebalance may be triggered if the aggregate weight of companies individually accounting for more than 4.5% of the index tops 48%. Based on this, NASDAQ announced its plan to rebalance the index on 7 July. The new weights were applied before the start of trading on 24 July. What happened in the past? Strong rallies in tech stocks were behind the special rebalances both in May 2011 and December 1998. In 2011, Apple was among the stocks that saw its weight being reduced notably following a period of strong performance. And in 1998, it was Microsoft1. Performance of the index following the two rebalances does not give much to go by. Following the rebalance in December 1998, the NASDAQ 100 continued on its upward trend while the index was weighed down following the rebalance in May 2011. What it means for investors For investors looking to position themselves tactically to benefit from this development, arguments can be made to support both bullish and bearish cases. Passive money tracking the NASDAQ 100 Index will be forced to sell the biggest names on Wall Street which have made a significant contribution to the index’s performance this year. This could create some volatility in the short-term especially given the special rebalance has happened in the middle of the earnings season and market sensitivity to announcements may be heightened. Already in the week of 17 July, when Tesla and Netflix announced their earnings, markets reacted adversely to their cautious outlook for the third quarter. This also means that it would be hard to completely isolate the impact of the rebalance on stock prices. A dip in prices may, however, may be seen by some investors as an entry point. But while the move from NASDAQ is aimed at reducing the concentration of the biggest tech names in the index, the special rebalance does not mean that the NASDAQ 100’s risk profile has changed materially. The index follows a modified market capitalisation methodology which means that, subject to some limits of influence, the biggest companies will still occupy the largest weight. The index, therefore, continues to give investors a way to capture the sentiment in growth stocks, bullish or bearish. In some of our recent blogs, we have also emphasised how the NASDAQ 100 is not a way to capture specific tech megatrends such as artificial intelligence (AI), despite investor sentiment towards AI driving the fortunes of some of the top names in the index. Dedicated AI strategies, such as the NASDAQ CTA Artificial Intelligence Index, tend to have relatively low overlap with the NASDAQ 100. Again, the rebalance does not fundamentally change this. Closing word The NASDAQ 100 Index was launched in 1985. This is only its third special rebalance in almost four decades. For an index which is focused on growth stocks, it signifies how contributors to performance have been concentrated right at the top this year. For tactical investors, there may be opportunities in the short-term resulting from this. For others, it may be a reminder of the need for diversification. Sources 1 Source: CNBC report from 05 April 2011 This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
FRED:NDQ100
by aneekaguptaWTE
The Implications of Nasdaq 100 RebalancingCME: Micro Nasdaq 100 Futures ( CME_MINI:MNQ1! ), E-Mini S&P Technology Select Sector Futures ( CME_MINI:XAK1! ) The Nasdaq 100 index tracks the 100 largest non-financial stocks listed on the Nasdaq stock exchange. Since its inception over 38 years ago, it has become the world’s preeminent large-cap growth index. So far in 2023, Nasdaq 100 has surged 42%, far outpacing the 18.7% gain from the S&P 500 and the 6.4% return by the Dow Jones Industrial Average. This big rally has prompted the Nasdaq to implement an index "Special Rebalance". What’s going on here? Nasdaq-100: Market-cap weighted Index with a Twist In the world of stock market indices, the two most common construction methodologies are equal-weighted and market-cap-weighted. The Nasdaq 100 is market-cap weighted, meaning the weight of each component is based on its market cap as a percentage of the aggregate market cap of the index. The higher the market cap, the bigger the weight. Nasdaq performs regular quarterly weight adjustments in March, June, September, and December. To prevent the index from becoming too top-heavy and unbalanced, Nasdaq imposes weight limits in its Nasdaq Index Weight Adjustment Guidelines. • No security weight may exceed 14% of the index. • If the aggregate weight of the five largest market capitalizations is more than 40%, they will be adjusted to 38.5%. • No security outside the largest five market cap companies may have a final index weight exceeding 4.4%. The list below shows index weight as of June 30th, the last quarterly adjustment, and the most recent market cap as of July 21st, for the top ten companies in Nasdaq 100: • No. 1, Microsoft (MSFT): market cap $2,556bn, index weight 12.92% • No. 2, Apple (AAPL): $3,019bn (12.57%) • No. 3, Nvidia (NVDA): $1,094bn (6.94%) • No. 4, Amazon (AMZN): $1,334bn (6.85%) • No. 5, Tesla (TSLA): $830bn (4.25%) • No. 6, Meta (META): $756bn (4.22%) • No. 7, Alphabet Class A (GOOGL): $1,560bn (3.71%) • No. 8, Alphabet Class C (GOOGL): $1,599bn (3.64%) • No. 9, Broadcom (AVGO): $373bn (2.40%) • No. 10, PepsiCo (PEP): $263bn (1.70%) • Top-5: market cap $8,833bn, index weight: 43.53% • Top-10: market cap $13,384bn, index weight: 59.20% • Nasdaq 100 (^NDX): aggregate market cap $25,990bn The Top-5 has already breached the 40% mark and will be brought down to 38.5% in the “Special Rebalance” to address the concerns of over-concentration: “A Special Rebalance may be conducted at any time based on the weighting restrictions described in the Index Rebalance Procedure if it is determined to be necessary to maintain the integrity of the Index.” How will this Rebalancing Impact Investors? According to the Nasdaq, over $500 billion in exchange traded funds (ETF) are tied to the Nasdaq-100, including Invesco QQQ ETF, iShares Nasdaq-100 UCITS ETF and ProShares UltraPro QQQ, just to name a few. If each fund tracks the Nasdaq 100 closely and responds to the rebalancing immediately, the Top-5 stocks in the portfolio will be reduced by 5% (from 43.5% to 38.5%). This would create short-term selling pressure in tens of billions of dollars. To put the figures in context: although the Top-5 companies have an aggregate market cap of nearly $9 trillion, they have a modest daily float. Based on my calculation, the average daily transaction value over the past three months was only $77 billion, less than 1% of their market valuation, with 337 million shares changing hands. Leading up to the rebalancing, we are seeing larger trade volume and higher volatility: • On July 21st, Microsoft had a trade volume of 69.3 million shares, vs. its 3-month average volume of 29.3 million shares; • Nvidia: trade volume 96.2m vs. 3-mo average 49.3m • Alphabet: trade volume 55.5m vs. 3-mo average 26.4m • Amazon: trade volume 69.5m vs. 3-mo average 63.6m Since peaking at 15,932 on July 19th, Nasdaq 100 has trended down in the last three trading sessions, currently trading at 15,455 on the morning of July 24th. Arbitrage Opportunity between Technology Indexes The Nasdaq 100 rebalancing is a unique issue with the Nasdaq 100 index. It has nothing to do with the fundamentals of these companies and has no impact on other Tech sector stock indexes which also include the same component companies. The S&P Technology Select Sector (XAK) has over 90% correlation with Nasdaq 100 (MNQ) historically. The former includes Apple, Microsoft and Nvidia, but not Alphabet or Amazon. In the past five years, XAK outperformed MNQ by 40%. In the past five trading days, MNQ underperformed XAK by 1%, likely due to the impact of the Nasdaq-100 rebalancing. In the long run, Nasdaq 100 rebalance will dilute the impact of the largest stocks in the index. Strong growth in Big Tech will be fully represented in XAK but capped in MNQ. This, in my opinion, would result in a widening spread between XAK and MNQ. XAK futures contract is based on $100 x S&P Select Sector Technology Index. At 1,786.6, each XAK contract has a notional value of $178,660 on July 21st. CME requires an initial margin of $9,500. MNQ contract is based on $2 x Nasdaq 100 Index. At 15,555, each MNQ has a notional value of $31,110. CME requires an initial margin of $1,680. Based on the relative notional values, someone bullish on the spread could establish a trade with 1 long XAK and 6 short MNQ. Using the last five days as an example: • If XAK increases by 1%, the long end of the trade would show a gain of $1,787 (17.9 x 100). If, during the same period, MNQ is flat, the short end would have no gain or loss. This spread combination would have a net gain of $1,787. • Using initial margins of $19,580 as a cost base, this equates to a one-week return of +9.1%. For comparison, if a trader invests in a Nasdaq 100 ETF and the index gains 1%, the return would also be 1%. Trading in futures comes with a leverage that would supercharge the gain if you were on the right direction. The spread trade would loss money if MNQ has a stronger performance than XAK. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
CME_MINI:XAK1!Long
by JimHuangChicago
9
Smart Rebalance StrategyThe smart rebalance strategy is a holding kind of strategy that works like the following: The user chooses a certain number of pairs, an initial capital and a rebalance timeframe. The capital is split equally between each pair. (ex. for 2 pairs: 50% on each). On each rebalance timeframe (on the bar it happens), pairs balance who grew bigger than 50% will be redistributed to other pairs, making sure that after the transaction, the total capital is once again split equally through all pairs. This means selling pairs whose price went higher than the others, and buying those who dropped. In other words, selling high and buying low. The inital capital corresponds to the quote currency of all pairs, so each pair must have the same quote currency. (ex: USDT or BTC markets) On each interval, the strategy will send orders for each pair saying whether to buy or to sell, and the quantity. Goal of the strategy is to grow your initial capital while splitting it through several pairs and keeping the pairs repartition unchanged.
Education
by cyatophilum
2