Finimize - 👋 Nvidia's in, Apple's out

What’s going on here?

The Technology Select Sector SPDR Fund (ticker: XLK) – one of the world’s most prominent tech ETFs – looks set to load up on Nvidia.

What does this mean?

XLK is designed to passively track an index made up of tech companies in the S&P 500. But clearly, the fund leaves some room for artistic license: while Nvidia makes up 22% of the S&P tech index, it represents just 6% of the ETF. See, old diversification rules mean that the combined weight of the biggest companies – those making up over 5% of the diversified fund – can’t add up to more than 50%. Problem is, Microsoft, Nvidia, and Apple each make up more than 20% of the S&P tech index. XLK’s chosen solution means the fund mimics the weight of the two biggest stocks, while making sure the third doesn’t breach the limit. So now that Nvidia has overtaken Apple as the world’s second-biggest tech company, XLK is set to triple the chipmaker’s weight during its quarterly rebalance later this month.

Why should I care?

For markets: Let’s talk numbers.

XLK will upgrade Nvidia’s weight from 6% to 21%, while Apple’s will be cut from 22% to 5%. The shift would mean State Street, the ETF’s manager, will need to buy $11 billion of Nvidia shares and sell $12 billion of Apple. That’s a major spring clean: the Apple sale alone matches the company’s average daily trading value over the past three months.

The bigger picture: This isn’t copy-and-paste.

Passive index funds are meant to track a benchmark, but this reshuffle is an extreme example of how far they can stray. Bear in mind, too, that XLK’s shrunken Nvidia allocation means its investors have missed out on the full effect of the chipmaker’s show-stopping rise. In fact, XLK has trailed the S&P tech index by five percentage points this quarter – the biggest gap since 2001.

What’s going on here?

The S&P 500 broke yet another record, as investors pledged their allegiance to US tech stocks (again, and again, and again).

What does this mean?

The “Magnificent Seven” stocks – Amazon, Nvidia, Apple, Microsoft, Alphabet, Tesla, and Meta – have climbed an impressive 37% this year. That’s pulled the S&P 500 up by 15%, enough to see the index hit its 30th record high this year. But tech isn’t the only buoy for US stocks: a strong economy, companies reporting better performance, and potential interest rate cuts are all attracting investors to the index. Factor in the AI hype and cooling inflation, and it’s no wonder stocks have been on a tear. Optimistic analysts even speculate that investors might move some of the $6 trillion that’s currently held in money-market funds into stocks, giving the rally another leg up.

Why should I care?

Zooming out: The other side of the coin.

Citigroup, Goldman Sachs, and Evercore have all upped their forecasts, expecting the index to rise at least another 2%. Mind you, the average outlook still predicts a drop. You can see why: more stocks have been slipping than climbing recently. Plus, the uncertain timeline for widespread AI use could put investors off tech, while a slowing economy could squeeze profit as companies lose the ability to up their prices. Even hedge funds are playing it safe, cutting their market exposure – essentially their risk levels – by the most since March 2022.

The bigger picture: Incredible India.

The US isn’t the only one making waves: India’s stock market hit over $5 trillion for the first time on Tuesday. Indian stocks have been in especially high demand since the prime minister secured enough support to form a new coalition government, which could promote stability in the world’s fastest-growing major economy. The cherry on top was a recent upgrade of India’s sovereign credit ratings by S&P Global Ratings.