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Friday’s Trading Could Trigger a $10 Billion Rush of Demand for NVIDIA. Here’s How

June 14, 2024
minute read

The jockeying between the largest stocks in the U.S. market is particularly significant this Friday, as Nvidia's performance could trigger a major shift in a $70 billion fund.

The focus is on the Technology Select Sector SPDR Fund (XLK), which undergoes its quarterly rebalance based on market cap values at Friday’s close. Currently, Apple and Microsoft each hold about 22% of the fund, while Nvidia, despite being close in market cap, holds less than 6%.

S&P Dow Jones Indices’ rules suggest that a similar disparity could emerge again in this rebalance. The race to secure one of the top two spots is tight, with the market caps of Microsoft, Apple, and Nvidia all within $100 billion of each other as of Thursday’s close, according to FactSet. The XLK index uses a float-adjusted market cap, so traders will need to wait for the official announcement from S&P Dow Jones Indices to confirm the final order.

According to a June 12 UBS note, if Nvidia surpasses Apple to take the second spot, its weight in the fund could jump to 21%, while Apple’s could drop to 4.5%. Such a shift would require the fund to purchase over $10 billion worth of Nvidia shares around June 21, the rebalance date. For comparison, Nvidia's trading volume was about $50 billion on Friday, June 7, per FactSet.

Such significant shifts in index funds are rare but not unprecedented. Matthew Bartolini, head of SPDR Americas Research, noted similar rebalances during sector classification changes, such as when Amazon moved to the consumer discretionary category. “If we are forced to have a significant trade, we are well equipped to handle it,” Bartolini stated.

The gap between Nvidia and Apple is due to the massive size of a few tech stocks and the diversification rules of the fund. The XLK tracks an index from S&P Dow Jones Indices, which imposes weighting caps, including a 23% limit for the largest stocks and a cumulative weight cap of less than 50% for all stocks with more than 4.8% shares. Thus, if two tech giants each make up over 20% of the index, the third stock must be set well below its relative market cap.

Fund issuers like State Street will have a week to prepare for the index changes. ETFs collaborate with banks to buy and sell large quantities of stocks during rebalancing, which can manifest as distinct inflows and outflows, known as “heartbeat trades,” according to Mohit Bajaj, director of ETF Trading Solutions at WallachBeth Capital. Bartolini mentioned that SPDR does not comment on trading strategies around rebalances.

Professional traders might pre-position or front-run such changes to exploit the demand, although this practice has decreased over time. “The close has become so efficient now. Depending on how many shares of Nvidia are required, it might cause a short-term spike,” Bajaj explained.

SPDR is not the only fund family tracking S&P Dow Jones Indices, either directly or indirectly. Other sector funds are also being rebalanced this month, which could help offset significant changes in the XLK.

The potential shuffle in the XLK highlights the concentration risk caused by a few companies holding a large weight in stock portfolios. Some investors and market strategists have expressed concerns about the dominance of the “Magnificent 7” since late 2022. In 2024, the concentration has become even narrower. A June 11 note from Strategas ETF strategist Todd Sohn indicated that Nvidia, Apple, and Microsoft each account for more than 6% of the entire S&P 500, with Nvidia contributing 35% of the index’s year-to-date gains.

State Street Global Advisors’ mid-year ETF outlook advised investors to consider equal-weighted strategies like the SPDR NYSE Technology ETF (XNTK) to mitigate concentration risks. “A more equal-weighted approach across tech, communications services, and consumer discretionary stocks at the forefront of AI might help balance out those concentration risks while still allowing participation in this theme,” Bartolini suggested.

Cathy Hills
Associate Editor
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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