The giant ETF SPDR fund, with a scale of up to $71 billion, tracks technology stocks. It will conduct quarterly rebalancing this week to adjust stock weights. The surge in Nvidia's stock price may result in the ETF buying a large amount of Nvidia stocks with a value of over $10 billion while selling Apple stocks worth about $11 billion. The top stock of this index is shown to be Nvidia according to recent calculations, followed by other stocks, and then Apple. Note that under the regulatory S&P Dow Jones Indices method, individual stock weight cannot exceed 24%, and the combined weight of companies occupying 4.8% or more should not exceed 50%. If the total weight of the largest stocks exceeds the cumulative weight limit, the weight of the smallest company will be systematically reduced until it reaches the limit, and the excess weight will be allocated to other smaller companies in the index.$The Technology Select Sector SPDR® Fund (XLK.US)$Once the rebalancing is decided, hedge funds and market arbitrators may compete to buy or sell stocks of affected companies, a process known as "front-running". This may have a negative impact on the stock prices when the ETF is ready for adjustment. Earlier, scholars published papers claiming that front-running behavior caused price distortions, thus profiting at the expense of ETF investors.

Matthew Bartolini, head of SPDR Americas Research, recently stated:

A newly calculated result shows that Dow Jones Industrial Average index's top stock is Nvidia, followed by other stocks and then Apple. According to The Wall Street News website, under the regulatory S&P Dow Jones Indices method, individual stock weight cannot exceed 24%, and the combined weight of companies occupying 4.8% or more should not exceed 50%. If the total weight of the largest stocks exceeds the cumulative weight limit, the weight of the smallest company will be systematically reduced until it reaches the limit, and the excess weight will be allocated to other smaller companies in the index.$Microsoft (MSFT.US)$Apple$NVIDIA (NVDA.US)$Other$Apple (AAPL.US)$.

If there is no upper limit set, the weights of Microsoft, Nvidia, and Apple in the index will all exceed 20%. However, the diversification rules of the index limit the total weight of stocks that account for at least 5% of the weight. Therefore, the weights of Microsoft and Nvidia may be around 21%, and the weight of Apple will drop to about 4.5%.

Note that under the regulatory S&P Dow Jones Indices method, individual stock weight cannot exceed 24%, and the combined weight of companies occupying 4.8% or more should not exceed 50%. If the total weight of the largest stocks exceeds the cumulative weight limit, the weight of the smallest company will be systematically reduced until it reaches the limit, and the excess weight will be allocated to other smaller companies in the index.

The above latest weight settings of XLK are significantly different from the previous weight distribution, which kept Nvidia's weight at a lower level: as of June 14, the weights of Microsoft and Apple in the ETF were about 22%, and Nvidia's weight was 6%.

Based on the asset scale of $71 billion managed by XLK, a 15 percentage point change in the ETF is equivalent to more than $10 billion in funds.

Analysis shows that such a major shift in index funds is not common but not unprecedented. Bartolini previously stated that there have been rebalancing around industry classification changes, such as Amazon being moved to non-essential consumer goods. If SPDR is required to make a significant trade, he believes it has the ability to do so.

The rebalancing of XLK will be based on the closing price adjustment of last Friday's market value, and will officially take effect this weekend. SPDR will not comment on specific trading strategies related to rebalancing.

What makes the whole process even more complicated is that the final market value number used in the rebalancing process may differ slightly from the number reported by financial media institutions. The S&P Dow Jones Indices uses a market cap index called the float-adjusted market value to determine how much to include the number of a company's floating shares when calculating the rebalancing weight.

SPDR previously stated in a document that it does not include shares held by long-term strategic shareholders, who include company executives, asset management companies, insurance companies with seats on the board of directors, and shares held by other listed companies.

This rebalancing of XLK comes as it is far lagging behind widely quoted benchmarks: S&P 500 Information Technology Index, which has risen about 34% since the beginning of this year without any investment funds directly tracking it, while XLK has risen only about 23% during the same period. Nvidia's explosive rise is the main reason for this gap.

Once the rebalancing is decided, hedge funds and market arbitrators may compete to buy or sell stocks of affected companies, a process known as "front-running". This may have a negative impact on the stock prices when the ETF is ready for adjustment. Earlier, scholars published papers claiming that front-running behavior caused price distortions, thus profiting at the expense of ETF investors.

Editor/Somer