Nasdaq 100 Rebalancing To Reduce Apple Weighing From 20% To 12%

Tyler Durden's picture

In what could easily be the biggest news of the day, even more important than the most recent Chinese rate hike, the one stock that determines the broader stock market level more than any other, Apple, may well get crushed today as index arbs dump it following news that the Nasdaq 100 intends to announce a rebalancing which will see AAPL drop from a 20% to a 12% weighing. According to the WSJ, the move is akin to what various exchanges do when they hike margin rates to prevent commodity prices from surging: "The rebalancing was driven in part by the seemingly unstoppable rise in Apple shares, which are up more than fourfold in the past two years. The tech company's big weighting means that a change in fortune for the maker of iPhones, iPods and iPads has a huge impact on one of the most heavily traded indexes in the market. After the rebalancing, which takes effect May 2, Apple will make up 12% of the Nasdaq-100." Whether this will be the end of the company's relentless rise remains to be seen although any impairment in the sensitive ecosystem of technical factors that has so far prevented any fund from selling the company may well be impaired at this point, leading to the first bona fide sell off in the name in the past 3 years.

From the WSJ:

The move could mean significant selling pressure on Apple shares by money managers tracking the index. Because of the way the index has been calculated, Apple was given more than twice the weight in the index than it should have had based on its number of shares. Under the new plan, it will be reduced to the weight it should have given its size.

Apple's market capitalization is roughly $300 billion, twice that of Google. But its weighting in the index was five times that of Google. After the rebalancing, Google's share of the index will be 5.8% compared to Apple's 12.3%. Apple will remain the largest component of the index.

In addition to Apple, 81 other stocks will see their share of the index reduced. The remaining 18 stocks will get a boost in the index. Among the biggest beneficiaries will be Microsoft Corp., whose weighting in the index was reduced in the only other special rebalancing of the index 13 years ago. Microsoft will see its weighting boosted to 8.3% from 3.4%.

The rebalancing is likely to kick off waves of trading in the stock market as money managers scramble to adjust holdings to reflect the new composition of the index. There are more than 2,900 financial products tracking the Nasdaq-100 in 27 countries, Nasdaq says. That includes the $24.4 billion PowerShares QQQ exchange-traded fund, which over the past year has been the sixth most actively traded stock on U.S. exchanges.

Nasdaq estimates that for every $1 billion directly tracking the index, such as through mutual funds or ETFs, 9.5 million shares will change hands. "It's going to be a big trade," says John Jacobs, executive vice president at Nasdaq. However, "we wanted to make this very transparent. Everyone will see what we're doing and everyone will have a month before we do this."

The rebalancing is being driven by more than just Apple, even if it is by far and away the stock that will see the biggest change. The reasons tie back to the complex inner workings of the index that determine each stock's weighting. The reweighting is based on shares outstanding for the stocks in the index as of March 31, Nasdaq said.

Various stockholders have already complained vocally that this is unfair as it is comparable to changing the rules in the middle of the game.

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