Nvidia and Apple are in a race to see which company is bigger at the end of the week. At stake? $20 billion.
Bloomberg Intelligence ETF analysts James Seyffart and Athanasios Psarofagis note that the upcoming June rebalance of the S&P Technology Select Sector SPDR Fund is likely to be “unusually large.”
There will be billions of dollars coming out of Apple’s stock and into Nvidia’s if the chip designer has a bigger market cap than the iPhone maker as of this Friday’s close.
Why the ranking between the two stocks matters: The rules governing XLK, the S&P fund, state that the sum of companies with weights above 4.8% in the fund cannot exceed 50% of the fund. If that’s the case (as it has been), the smallest company that is above 4.8% gets re-weighted down to 4.5%, and this process continues until the aforementioned 50% threshold is not breached.
So when an index gets very top-heavy (as the tech sector has), even the gods among them can be reduced to the status of mere titans. Microsoft and Apple’s run of dominance has meant that XLK has effectively been very underweight Nvidia relative to what a purely market cap-weighted index would be – it’s been a stock that “deserved” a weighting above 4.5%, but kept getting chopped down to that level at quarterly rebalances.
But if Nvidia is bigger than Apple, the two switch places: According to Bloomberg Intelligence, that would entail a sale of $11.3 billion in Apple stock and a purchase of $9.8 billion in Nvidia shares.
When we’re talking about billions of dollars in flows on stocks worth trillions, a little context can be useful to get a sense of how much this money might dictate price action. For Nvidia, an inflow of $9.8 billion is certainly nice, but the stock trades that much value before lunchtime on the average day. For Apple, $11.3 billion out the door would be more than a flesh wound – that’s more value than the stock has averaged per day over the past month. However, volumes on the rebalance date – next Friday – will be likely be very elevated across the board because of triple-witching (a massive date for options expiries), so that helps.
These pesky fund design and rebalancing rules have been holding back XLK’s returns by a lot, thanks to how well Nvidia has done compared to other mega-cap tech stocks.
“Repeatedly capping Nvidia at 4.5% for each rebalance in the past six quarters has hindered XLK’s returns by at least 14 percentage points since September 2022,” conclude Seyffart and Psarofagis.
All in all, this is a reminder that the construction of so-called passive index funds might make them behave in ways that investors may not always be aware – and that they can sometimes make a whale of an active trade.
