Key
Points
-
The
Technology
Select
Sector
SPDR
Fund
(XLK)
has
an
upcoming
rebalance
based
on
Friday’s
market
caps. -
Apple
and
Microsoft
are
the
two
biggest
holdings
in
the
fund
currently,
at
roughly
22%
each. -
Nvidia
makes
up
less
than
6%
despite
being
only
slightly
behind
the
two
leaders
in
market
cap.
The
jockeying
between
the
biggest
stocks
in
the
U.S.
market
takes
on
extra
importance
Friday,
as
a
strong
close
to
the
week
for
Nvidia
could
cause
a
huge
shift
in
a
$70
billion
fund.
At
stake
is
one
of
the
top
two
spots
in
the
Technology
Select
Sector
SPDR
Fund
(XLK)
,
whose
June
rebalance
is
based
on
market
cap
values
as
of
Friday’s
close.
Apple
and
Microsoft
are
the
two
biggest
holdings
in
the
fund,
at
roughly
22%
each.
Nvidia
makes
up
less
than
6%
despite
being
only
slightly
behind
the
two
leaders
in
market
cap.
The
rules
used
by
S
&
P
Dow
Jones
Indices
suggest
a
similar
gap
could
occur
again
at
this
quarterly
rebalance,
and
the
race
to
be
among
the
top
two
appears
to
be
coming
down
to
the
last
day.
The
market
caps
of
Microsoft,
Apple
and
Nvidia
were
all
within
$100
billion
of
each
other
as
of
Thursday’s
close,
according
to
a
FactSet
calculation.
The
index
followed
by
the
XLK
uses
a
float-adjusted
market
cap
to
make
the
determination,
so
traders
may
need
to
wait
for
S
&
P
Dow
Jones
Indices’
official
call
to
be
sure
of
the
final
order.
Projections
from
a
June
12
UBS
note
suggested
that,
if
Nvidia
climbs
to
second
and
bumps
Apple
to
third,
it
could
result
in
the
chipmaker’s
weight
in
the
fund
vaulting
to
21%,
while
Apple
would
be
slimmed
down
to
just
4.5%.
A
15
percentage
point
swing
in
Nvidia’s
weight
would
mean
that
the
fund
would
need
to
acquire
more
than
$10
billion
worth
of
shares
in
the
chipmaker
—
all
on
or
very
close
to
June
21,
the
rebalance
date.
For
context,
there
was
roughly
$50
billion
of
total
Nvidia
volume
on
Friday,
June
7,
according
to
FactSet.
This
type
of
big
shift
in
an
index
fund
is
unusual,
but
not
unprecedented.
Matthew
Bartolini,
head
of
SPDR
Americas
Research,
pointed
to
rebalances
around
changes
to
sector
classification,
like
when
Amazon
was
moved
to
the
consumer
discretionary
category,
as
an
example.
“If
we
are
forced
to
have
a
pretty
significant
trade,
I
think
we
are
well
equipped
to
handle
those,”
Bartolini
said.
How
it
works
The
current
gap
between
Nvidia
and
Apple
is
caused
by
the
massive
size
of
just
a
handful
of
tech
stocks
and
the
diversification
rules
that
govern
the
fund.
The
fund
tracks
an
index
from
S
&
P
Dow
Jones
Indices
that
uses
weighting
caps
to
keep
the
index
in
bounds.
Those
include
a
limit
of
23%
for
the
biggest
stocks,
and
a
cumulative
weight
of
less
than
50%
for
all
stocks
with
a
share
greater
than
4.8%.
Therefore,
if
two
of
the
tech
giants
account
for
more
than
20%
of
the
index
apiece,
then
the
third
stock
in
line
has
to
be
set
well
below
its
relative
market
cap.
State
Street
and
other
fund
issuers
will
have
a
week
to
prepare
for
the
index
changes.
ETFs
work
with
banks
to
buy
and
sell
large
quantities
of
stocks
around
rebalancing,
said
Mohit
Bajaj,
director
of
ETF
Trading
Solutions
at
WallachBeth
Capital.
Sometimes
these
moves
show
up
as
distinct
inflows
and
outflows
and
are
called
“heartbeat
trades.”
Bartolini
said
SPDR
does
not
comment
on
trading
strategies
around
rebalances.
Professional
traders
can
sometimes
pre-position,
or
front-run,
this
type
of
big
change
to
take
advantage
of
lopsided
demand,
though
this
practice
has
decreased
over
time,
according
to
Bajaj.
“The
close
has
become
so
efficient
now.
Depending
on
how
many
shares
of
Nvidia
are
required,
it
might
cause
a
short-term
spike
in
the
name,”
Bajaj
said.
SPDR
is
not
the
only
fund
family
that
tracks
S
&
P
Dow
Jones
Indices,
either
directly
or
indirectly,
and
the
sector
funds
are
not
the
only
ones
being
rebalanced
this
month.
That
could
mean
shifts
in
other
products
could
help
offset
any
big
changes
in
the
XLK.
Concentration
risk
The
potential
shuffle
in
the
XLK
is
a
mechanical
example
of
some
of
the
issues
caused
by
historically
large
weight
of
just
a
few
companies
in
stock
portfolios.
Some
investors
and
market
strategists
have
been
worried
about
the
weight
of
the
so-called
“Magnificent
7”
throughout
this
market
rally,
which
began
in
late
2022.
In
2024,
the
group
of
top
stocks
has
gotten
even
narrower.
According
to
a
June
11
note
from
Strategas
ETF
strategist
Todd
Sohn,
Nvidia,
Apple
and
Microsoft
all
account
for
more
than
6%
of
the
entire
S
&
P
500,
with
Nvidia
responsible
for
35%
of
the
index’s
year
to
date
gains.
In
State
Street
Global
Advisors’
mid-year
ETF
outlook,
the
firm
suggested
investors
take
a
look
at
equal-weighted
strategies
such
as
the
SPDR
NYSE
Technology
ETF
(XNTK)
to
pull
some
risk
away
from
those
few
stocks.
“A
more
equal-weighted
position
across
tech
and
communications
services
and
consumer
discretionary
stocks
that
are
on
the
forefront
of
AI
might
actually
help
balance
out
those
concentration
risks,
while
also
still
allowing
you
to
partake
in
this
theme,”
Bartolini
said.
—
CNBC’s
Michael
Bloom
contributed
reporting.
