From next Monday, July 24th, NASDAQ-100 will undergo a special rebalancing to address the issue of index concentration by redistributing weights.
However, Goldman Sachs believes that this adjustment will not solve the problem of market concentration, and NASDAQ-100 will still be overly concentrated. Therefore, funds linked to it cannot be considered as actively managed diversified funds. The impact of rebalancing on affected stocks will also be limited.
The quarterly rebalancing of NASDAQ-100 aims to prevent any individual stock from having a weight exceeding 24% in the index and to prevent the combined weight of issuers with weights exceeding 4.5% from exceeding 48%. In the rebalancing evaluation in June, no conditions triggering rebalancing were met. The highest-weighted component stock, Microsoft, has a weight of 12.8%, still well below the 24% threshold.
However, as of July 3rd, each component stock of the six major issuers in NASDAQ-100 has exceeded 4.5% throughout the week, with a combined weight of 51%.
Goldman Sachs estimates that starting from July 24th, the combined weight of the current seven major NASDAQ-100 component stocks will decrease from the current 56% to 44%.
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Among them, Nvidia and Microsoft will be most affected, with their weights each being reduced by about 3 percentage points. Apple's weight will decrease from 12.1% to 11.5%, becoming the largest component stock, while Microsoft will fall to second place with a weight reduction from 12.8% to 11.5%. The weights of NASDAQ-100 index component stocks will be closer to the market value ranking of large-cap stocks.
The reduction in the weight of the largest component stock will be offset by an increase in the weight of smaller component stocks, with Broadcom experiencing the largest increase, rising from 2.4% to 3.0%.
Goldman Sachs estimates that due to the decrease in the weight of heavyweight component stocks, the value of passive net selling in the market will exceed the average daily trading volume of Google's parent company, Alphabet, and more than one-third of the daily trading volume of Microsoft, Amazon, and Nvidia.
Goldman Sachs strategists predict that the factors driving the returns of NASDAQ-100 and its largest component stocks in the next six months will be profit growth, valuation, and the macro environment, rather than this special rebalancing.
On Monday, July 10th, the first day after NASDAQ-100 announced the weight adjustment, the stock price trend showed that investors had some pre-trading in response to the adjustment. However, the selling pressure on large-cap tech stocks was short-lived. Since last Tuesday, the average return of the seven major NASDAQ-100 component stocks has been 5%, higher than the overall return of NASDAQ-100 at 3.5%.
According to Goldman Sachs, previously the largest constituents of this index outperformed the market and their weights increased, forcing mutual funds to underweight these stocks, which in turn damaged their returns. Only 31% of the large-cap stock funds have outperformed the benchmark this year.
The actively managed mutual funds benchmarked against the NASDAQ-100 have assets under management of only $10 billion, much lower than the $2 trillion for the S&amp;P 500 funds and the $805 billion for the Russell 2000 funds.
Goldman Sachs believes that even after the rebalancing of the NASDAQ-100, the combined weight of the constituents with weights exceeding 5% will still reach 32%, which does not meet the diversification requirements for actively managed funds as stipulated by law.
The U.S. Investment Company Act passed in 1940 stipulates that so-called &#34;diversified&#34; funds should not hold positions exceeding 25% of their portfolio, and the proportion of each position should not exceed 5% of their portfolio.
Therefore, many funds will be unable to proactively adjust their positions this Friday and will be forced to take action on the same day to ensure alignment with their exposures and the new weights of the NASDAQ-100.
Analysts at Wells Fargo Bank believed last week that after the rebalancing, heavyweight index-tracking ETFs such as Invesco QQQ Trust would also need to adjust their holdings accordingly, but this rebalancing strategy itself is unlikely to have a profound impact on the future performance of the NASDAQ-100. Tech giants such as Apple, Microsoft, and Amazon will still dominate this index.

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Goldman Sachs believes that the impact of adjusting individual stocks is limited. Among the major constituents, Nvidia and Microsoft have the largest reduction in weight, both of which will be reduced by 3 percentage points. Microsoft will be downgraded from the top to the second largest constituent stock, while Apple will rise to the top position. The largest increase in weight among the stocks to be upgraded is Broadcom.

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Goldman Sachs evaluates the special adjustment of the NASDAQ Composite Index: It is impossible to solve the problem of excessive market concentration.