Tech XLK Rebalancing
The next rebalancing of tech XLK may lead to a drastic change.
Its indexing rule limits the super-sized weight total to 50%, so MSFT and AAPL are super-sized now, but NVDA’s weight is clipped*, and everything else is capped under 5%. If NVDA continues to have market=cap bigger than AAPL, then NVDA would be super-sized (i.e. MSFT, NVDA would be super-sized), and AAPL would be clipped*. This would require selling $11.4 billion of AAPL and buying $9.8 billion of NVDA. Both being maga-caps, this may be just a ripple, or not.
Other tech ETFs do things differently and won't be affected by this change in XLK.
*This is a weird aspect of SPDR XLK indexing rule. More rational would be to proportionately reduce the super-sized weights, but XLK takes it all from the smallest of the group, now NVDA.
https://www.morningstar.com/etfs/arcx/xlk/portfolio https://x.com/JSeyff/status/1800602335733059779 https://theedgemalaysia.com/node/715084
Comments
6/14/24 close will determine the order, but rebalancing will happen a week later on 6/21/24.
https://www.cnbc.com/2024/06/17/nvidia-to-get-20percent-weighting-and-billions-in-investor-demand-while-apple-demoted-in-major-tech-fund.html
https://www.morningstar.com/news/marketwatch/20240617132/popular-tech-etf-forced-to-dump-apple-stock-buy-nvidia-in-upcoming-rebalancing
Things were really close in Friday's finish. In fact, AAPL was ahead of NVDA in the market-cap, but SPDR uses free-floats for XLK, and there NVDA seems ahead. So, for example, Warren Buffett couldn't have helped out his buddy Tim Cook by buying a few billion worth of AAPL that he sold recently - because of his large AAPL position, his shares are no longer part of the free-float.
All these articles do hedge a bit because SPDR/S&P hasn't issued a formal press release yet (why not?). But this huge AAPL to NVDA shift in XLK will be all done by the coming Friday, 6/21/24.
IMO, SPDR/S&P should review its strange way of rebalancing - nobody else does it in this silly manner.
I am starting to notice that a lot of indices are free float adjusted in applying their primary criteria. That is like poring oil on fire and feeding further into prevailing retail sentiment. Is there an implication in the reverse also?
NVDA seems more like a momentum stock these days, so not interested in it.
Many recent IPOs offer extreme examples (ARM, Saudi ARMCO - in Middle Eastern markets, etc) where only a small % of market-cap is issued.
Most other funds use proportional adjustments when caps are encountered. For example, if 3 stocks are eligible to be counted in 50% limitation, and they have approximately the same free-floats, then 3X = 50, or X = 0.1667, or 16.67% weight for each may be used. But the XLK formula knocks down the smallest (even by the tiniest amount), so 2X + 4.5 = 50, or X = 0.2275, or the weights 22.75%, 22.75%, 4.5%. That is what will cause this massive shift as NVDA used to be #3, but now AAPL is #3.
https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/free-float/
https://www.investopedia.com/terms/f/freefloatmethodology.asp
Treasury shares are usually not counted (in the US) even before making a free-float adjustment. This is because indexes start with outstanding stock and Treasury shares are not outstanding. (They're issued but not outstanding, due to the buyback.)
From S&P Global Index Mathematics Methodology: https://www.spglobal.com/spdji/en/documents/methodologies/methodology-index-math.pdf
OTOH, S&P's Float Adjustment Methodology gives a much more detailed and nuanced description of what is and isn't included in free float. Regarding Treasury stock it notes: https://www.spglobal.com/spdji/en/documents/index-policies/methodology-sp-float-adjustment.pdf
What it means by "local reporting" is country by country. Some countries include treasury shares in their outstanding stock calculations, others don't. MSCI clarifies this somewhat: https://www.msci.com/index/methodology/latest/FreeFloatData (pdf)
Conceptually, yogi's first sentence says it all:
The use of free-float in indexes is sensible as that is the float that is publicly available.
If one cares about the nitty gritty, see pp. 3-4 of the S&P Float Adjustment Methodology doc. (FWIW, it's fairly short but still more than I care to know.)
I see heavy insider selling in some company shares for nearly year and no insider buying. I am also seeing hedge funds lightening up on some of the retail favored stocks. All these extra shares add to the free-float, which then impacts how much of the retail favored stocks are weighted in the index. (At least they are not doing it by trading volume.)
XLK methodology is a bit strange any way.
Let us see when Apple gets back what it is giving up in the index.
But I do hold LC-growth and MSFT, NVDA, APPL are top stocks in those funds.
These 3 are also top stocks in SP500 accounting for 20% of SP500.
So, this shift of about $11 billion in the next few days may have a notable effect on LC-growth and/or the market.
Posters are free to skip - XLK is in the title.
https://www.ssga.com/us/en/intermediary/etfs/funds/the-technology-select-sector-spdr-fund-xlk