Special Rebalance: Nasdaq Chaos Triggered by Tesla

On July 3rd 2023, Tesla’s stock price jumped causing its weighting on the Nasdaq 100 to surpass 4.5%. Together with the rally of tech giants boosted by the AI frenzy, Nasdaq’s Special Rebalance was activated based on the Quarterly weight adjustment methodology.

This weight adjustment methodology dictates that when the aggregate weights of all issuers with an Index weighting equal or above 4.5% surpasses 48%, then their total weight is capped at 40%. 

As of 3rd July, on the issuer level Google (Alphabet) has a weight above 4.5% meaning, the summation includes all securities in the table apart from Meta and Broadcom. This gives an aggregate weight of 50.9% breaching the threshold of 48% leading to Nasdaq’s announcement on the 7th July 2023 (source). This sum of 50.9% will be reduced to 40% on the effective date 24th July 2023. Seemingly, the only giant saved from capping is Meta.

In this scenario, the capped giants’ shares will experience selling pressures by passive funds which will have to reduce the issuer’s weight. On the other hand, passive demand will be experienced by the uncapped securities in the index due to reallocation of capital from the sold shares also known as reweight.

Based on the estimated weight changes, the passive tracking of the Nasdaq 100 and latest prices, the biggest passive fund outflows include:

1. $19.2b (resp. 2.04 ADV) for Microsoft,  
2. $18.4b (resp. 1.73 ADV) for Apple, 
3. $11.2b (resp. 0.51 ADV) for Nvidia, 
4. $10.3b (resp. 0.95 ADV) for Amazon and 
5. $6.9b (resp 0.18 ADV) for Tesla.

Leading the biggest passive inflows is Meta with almost $7b (resp. 0.95 ADV) and Broadcom with $3.8b (resp. 1.4 ADV)

The above passive fund flows are expected to materialise as of the close of Friday 21st July and become effective Monday 24th July.