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Advisors that allocate portions of client portfolios to the Invesco QQQ (NASDAQ: QQQ) or the Invesco NASDAQ 100 ETF (NASDAQ: QQQM) know that these exchange traded funds, which both track the NASDAQ-100 Index (NDX), are heavily allocated to the technology sector.
Those advisors likely also know that those ETFs are rebalanced quarterly and that the NASDAQ-100 Index is reconstituted annually in December. Thanks to the artificial intelligence (AI) boom that’s powered QQQ and QQQM to year-to-date gains of 36.28%, the cap-weighted version of NDX is more heavily concentrated than usual.
On July 3 – the first trading day of this month – the top six components in that index – combined for nearly half the gauge’s weight. Those names are Microsoft (NASDAQ: MSFT), Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA), Amazon (NASDAQ: AMZN), Tesla (NASDAQ: TSLA) and Meta Platforms (NASDAQ: META).
Technically Google parent Alphabet (NASDAQ: GOOG) is the third-largest holding in the ETFs as its two share classes combine for about 7.2% of the funds’ rosters. Point is QQQ and QQQM are heavily concentrated and AI is a big reason why.
Changes Are Coming
To Its credit, NASDAQ is aware of the concentration issue and recently announced steps to deal with it by way of a special rebalance.
“The Special Rebalance of the index will be enacted based on the index securities and shares outstanding as of July 3, 2023, and the index share announcements and pro-forma file release will take place July 14, 2023,” according to the exchange operator.
As noted above, the NDX reconstitution usually happens in December making the prospect of such a move in another month unusual. However, there is precedent for it. Not to get too into the weeds of indexing nerdiness, but the point is NASDSAQ lays out two scenarios, or stages, in which a special rebalancing can occur.
In plain English, Stage 1 occurs if one NDX component exceeds 20% of the index’s weight. The upcoming special reconfiguration is being triggered by Stage 2.
“If the aggregate weight of the subset of issuers whose Stage 1 weights exceed 4.5% does not exceed 48%, Stage 1 weights are used as final weights; otherwise, Stage 1 weights are adjusted to meet the following Stage 2 constraint, producing the final weights,” according to NASDAQ.
Translation: NDX’s “large” components are defined as those with weights of 4.5% and above. They cannot combine to exceed 48% of the benchmark’s total weight. As of July 10, Microsoft, Apple, Nvidia, Amazon, Tesla and Meta combine to top that threshold.
What Advisors Should Expect
As of today, NASDAQ hasn’t provided much detail in terms of how NDX, and thus QQQ and QQQM, will look after the July rebalancing.
For advisors, this isn’t a monumental event and it’s certainly not cause for alarm, but it’s worth being aware of because QQQ and QQQM will soon look a little bit different. Plus, the ETFs’ nearly $216 billion in combined assets under management confirm the advisor audience for these products is expansive.
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