Nvidia’s recent surge in value has led to significant changes in the holdings of major technology exchange-traded funds. The Technology Select Sector SPDR Fund (XLK) will be forced to acquire more than $10 billion worth of Nvidia shares, while reducing its holdings in Apple. According to Matthew Bartolini, head of SPDR Americas Research, Microsoft is now the top stock in the index, followed by Nvidia and Apple. This has resulted in a reshuffling of weightings, with Microsoft and Nvidia likely to have a weight of around 21%, while Apple’s weight will fall sharply to about 4.5%.
The rebalancing of the XLK fund highlights the challenges faced by passive index funds when it comes to maintaining diversification. Even with caps in place to prevent any one stock from dominating the index, the rapid growth of certain companies like Nvidia can lead to significant shifts in holdings. It is important for investors to understand how these funds are weighted and allocated, as rebalances can result in unexpected exposures and differences in performance from fund to fund.
The extreme example of the XLK rebalancing serves as a reminder that even passive index funds can experience divergence, especially when focusing on specific sectors of the market. The Technology Select Sector Index, which the XLK fund follows, uses a float-adjusted calculation to determine market cap. This means that large holders of individual stocks, such as Warren Buffett’s Berkshire Hathaway, can impact the market cap calculations. The rebalance will officially take effect at the end of the week and will remain in place for one quarter, even if Apple outperforms Nvidia during that time.
The rebalancing of the XLK fund is a reflection of the rapid changes taking place in the technology sector. As companies like Nvidia continue to experience exponential growth, index funds will need to adjust their holdings to maintain diversification and adherence to their investment mandates. It is crucial for investors to stay informed about these changes and to consider how they may impact their overall investment strategy. As the technology sector continues to evolve, the importance of understanding market cap weightings and rebalancing strategies will only grow in significance.