A significant reshuffling is imminent for one of the world’s largest technology ETFs, poised to increase its holdings in Nvidia Corp. (NASDAQ:NVDA) while reducing its exposure to Apple Inc. (NASDAQ:AAPL). This adjustment is expected to trigger billions of dollars in trading activity.
Following Nvidia’s market value closing above Apple’s on Friday, State Street Global Advisors is set to adjust the composition of its $71 billion Technology Select Sector SPDR Fund, barring any last-minute changes by index provider S&P Dow Jones Indices. Despite Nvidia’s 166% year-to-date surge, XLK has held fewer Nvidia shares compared to Apple, with Nvidia comprising roughly 6% of the ETF’s assets versus Apple’s 22% in the S&P 500 Information Technology Index. Diversification rules capping ownership have led to XLK’s significant underperformance this year.
Although S&P reserves the right to make exceptions, the ETF is expected to be rebalanced during its quarterly update at the end of June. As a result, Apple’s weighting in the ETF may drop to 4.5%, while Nvidia’s could rise above 20%, according to estimates shared by S&P with several market participants.
Projections indicate that State Street will purchase approximately $11 billion in Nvidia shares while offloading $12 billion in Apple shares. This sale in Apple is nearly equivalent to its average daily trading volume over the past three months.
Chris Harvey, head of equity strategy at Wells Fargo Securities, commented, “By our calculation, the flip-flop between Nvidia and Apple will occur. This aligns the XLK ETF more closely with the momentum trade and semis.”
An S&P spokesperson declined to comment on potential index changes, referring instead to the established methodology. Matt Bartolini, head of SPDR Americas Research at State Street, confirmed that XLK will rebalance according to its rules and methodology, emphasizing the ETF’s obligation to track the S&P benchmark while adhering to diversification regulations. He noted, “The rules have served investors well.”
Despite the possibility of exceptions, S&P has stated that any deviations from the general rules will be communicated to clients. A recent document suggested that S&P’s index committee “reserves the right to make exceptions when applying the methodology if the need arises.”
The reshuffling in the ETF’s holdings is influenced by diversification rules aimed at preventing concentrated bets. These regulations, dating back over 80 years, require that the combined representation of the largest companies in a diversified fund cannot exceed 50%.
Last year, similar restrictions led the overseer of the Nasdaq 100 to conduct a special rebalance to maintain compliance. Unlike the Nasdaq 100, XLK’s methodology involves trimming the smallest non-compliant stocks. This has resulted in Nvidia being under-owned by XLK, causing the fund to lag the S&P 500 tech sub-index by over 5 percentage points this quarter—the largest gap since 2001.
With Nvidia’s recent growth, XLK’s upcoming rebalancing has garnered significant interest on Wall Street due to the potential for volatility from weight adjustments among major tech companies.
James Seyffart, ETF analyst at Bloomberg Intelligence, remarked, “I am interested to see if they keep the rules the same through the next rebalance in September. If Apple surpasses Nvidia or Microsoft by the next reference date, we could see another massive rebalance involving billions in trades.”
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