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  • Writer's pictureRealFacts Editorial Team

Tech ETF Shake-Up: Nvidia’s Rise and Apple’s Decline in XLK

Nvidia chips

This week, Jesse Pound, CNBC reporter quotes Matthew Bartolini, head of SPDR Americas Research, who emphasizes the importance of understanding how stocks are weighted and allocated within ETFs. Nvidia’s significant increase in market value is poised to have a notable impact on the Technology Select Sector SPDR Fund (XLK), a major ETF focused on the tech sector. This adjustment necessitates a substantial acquisition of Nvidia shares, valued at over $10 billion, while reducing the fund’s allocation in Apple.

The reason behind this shift is an upcoming rebalancing of the index tracked by XLK, which adjusts based on market capitalization figures as of the previous Friday’s closing. According to Bartolini, Microsoft will now be the top holding in the updated index, followed closely by Nvidia, whereas Apple’s position will be significantly reduced. Despite these companies having substantial market caps, index regulations prevent any one stock or group from exerting overwhelming influence, necessitating this redistribution.

The rebalanced index aims to prevent over-concentration in individual stocks within the fund. Without these rules, Microsoft, Nvidia, and Apple would each exceed 20% of the index. However, diversification rules cap any single stock’s weight at 5% of the fund. As a result, Microsoft and Nvidia are expected to each represent approximately 21% of the fund, while Apple’s share will decrease notably to around 4.5%. This marks a significant shift from the previous distribution, where both Microsoft and Apple held about 22%, and Nvidia was limited to 6%.

This adjustment highlights how passive index funds like XLK must adapt to changes in their holdings to maintain balanced exposure and manage risk effectively. With XLK managing approximately $71 billion in assets, a 15-percentage-point reallocation represents a substantial redistribution exceeding $10 billion. This underscores the importance for investors to grasp the methodologies and frequency of adjustments in these funds, as these factors can lead to meaningful differences in performance and exposure.

The Technology Select Sector Index, which XLK adheres to, utilizes a float-adjusted market cap calculation to accurately reflect market dynamics. This method considers large holdings, such as those held by Warren Buffett’s Berkshire Hathaway in Apple, which may not be actively traded. Such an approach ensures the fund maintains its targeted exposure despite market fluctuations. The upcoming rebalancing scheduled for the next quarter demonstrates the adaptable nature of index funds in aligning their investment goals amidst a continuously evolving market environment.


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