of Technology Select Sector SPDR Fund (NYSE:XLK), the second largest ETF in the sector, is set to undergo a major rebalancing this week. NVIDIA Inc. (NASDAQ:NVDA) Apple. (NASDAQ:AAPL).
Big change
The change comes amid a relentless surge in Nvidia's stock price, fueled by its presence in artificial intelligence. The company's shares have soared 164% so far this year and surpassed Apple in market capitalization earlier this month. If Nvidia maintains its position as the world's second-largest company by the end of this week, XLK will increase its allocation of Nvidia shares to more than 20% and reduce its allocation of Apple shares to just 4.5%. According to Bloomberg, the change will generate $10 billion in transactions to buy Nvidia shares and about $11 billion in transactions to sell Apple shares.
Currently, the XLK ETF is heavily weighted to its top holdings, including Microsoft, Apple, and NVIDIA. As of June 11, 2024, Microsoft accounts for 22.4% of the ETF's weighting, Apple for 22.1%, and NVIDIA for 5.7%. Notably, all three stocks are worth more than $3 trillion amid the ongoing AI boom. Due to concentration limits, the fund must ensure that companies with weightings greater than 4.8% do not combine to make up more than 50% of its total holdings.
The concentration limits have weighed on XLK’s performance in recent months, despite a surge in Nvidia shares. In fact, XLK underperformed the S&P 500 Information Technology Index, which has a 21% weighting in Nvidia, by 5 percentage points between April and June, the largest gap since 2001.
XLK tracks the Technology Select Sector Index, which is technically not a market cap weighted index, but a “modified” market cap weighted index, which means that they can place certain limits or guidelines on how they weight their portfolios, usually to address potential issues like overconcentration.
NVIDIA and Apple will switch positions in the XLK portfolio, but the total number of holdings will remain at 65. By industry, the ETF currently has the largest allocations to software, semiconductors and semiconductor equipment, technology hardware, and storage and peripherals. The fund has total assets under management of $71.1 billion and pays an annual fee of 9 basis points.
New XLK offers growth opportunities
The change gives XLK a big boost, capitalizing on NVIDIA's rapid growth due to AI. The fund will continue to benefit from strong sector fundamentals. The expansion of AI applications has the potential to bring new growth opportunities within the sector. According to a new report from Grand View Research, the global artificial intelligence market is expected to reach $811.75 billion by 2030, registering a CAGR of 36.6% from 2024 to 2030.
At its most recent meeting, the Fed said it plans to cut rates once this year and expects four cuts in 2025. The Fed changed the wording of its statement to note that “some further progress has been made toward the Committee's 2 percent inflation objective.” Its previous statement noted “no” further progress. This suggests that interest rates will rise for some time to come. Big tech has shown strong resilience in these conditions. And when the Fed starts cutting rates later this year, tech stocks will rise. Because the tech sector relies on borrowing for superior growth, it is cheaper for it to borrow more to fund further efforts when interest rates are low.
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