On September 20th the S&P will make changes to its sector indexes to adhere to regulatory
concentration limits. This adjustment will have an impact on the $68 billion Technology Select
Sector SPDR ETF (XLK) particularly regarding its major holdings Microsoft (MSFT), Nvidia
(NVDA) and Apple (AAPL). These three companies have played a role in driving XLKs
performance representing 48% of the ETF and contributing to two thirds of its 16% return this
year. However, their increasing influence has raised concerns prompting regulatory caps to
prevent overconcentration in index funds and necessitating a rebalance. In response the S&P is
now updating its guidelines to ensure that XLK and other sector ETFs remain compliant. To
qualify as a Regulated Investment Company (RIC) that distributes profits directly to
shareholders without incurring taxation certain criteria must be fulfilled. These include limiting
investments in a stock to no more than 25% of assets and ensuring that the combined weight of
stocks exceeding 5% of the portfolio does not surpass 50%. S&P Select Sector indexes impose
restrictions, to comply with these regulations capping individual stock weights at 23%. However,
the rise of Microsoft, Nvidia and Apple has pushed these boundaries leading to the forthcoming
rebalance.
As of September 13, Microsoft, Nvidia and Apple hold a substantial share of XLK.
Microsoft: 21.95%
Nvidia: 20.09%
Apple: 4.86%
To avoid concentration, a new rule will lower the weights of all stocks exceeding 4.8%. This
means that Apples share in XLK will increase threefold and the ETF is set to purchase over $7
billion worth of Apple stock leading to notable trading activity on September 20. The Technology
Select Sector SPDR ETF isn’t the fund undergoing rebalancing; other S&P index funds will also
make adjustments on that day. While heightened trading volumes and potential volatility are
anticipated particularly with Apple, Microsoft and Nvidia the broader market may see increased
activity due to the substantial size of these funds. Investors should be ready for more volatility
than usual around the rebalance date.