Why a $70 Billion Fund is Expected to Invest Heavily in Nvidia and Sell Off Apple This Week

The Technology Select Sector SPDR Fund (XLK) is set to undergo a major rebalancing this week, where it will be forced to buy billions of dollars of Nvidia stock and sell a similar amount of Apple stock. Nvidia’s weight in the ETF is expected to nearly quadruple after its float-adjusted market capitalization surpassed Apple’s. This is due to the fund’s diversification rules, which have led to Nvidia being massively underweighted despite its value more than doubling this year.

XLK tracks the Technology Select Sector Index, which includes S&P 500 companies in the information technology sector. With Nvidia’s market cap surpassing Apple’s, the fund must adjust its holdings accordingly. The rebalancing is expected to take place on June 21, with XLK needing to sell about $12.6 billion in Apple stock and buy $10.9 billion in Nvidia stock.

The rise of Nvidia has posed a challenge for the fund’s diversification rules, as the company’s market cap now exceeds that of Apple and Microsoft. In order to comply with the rules, XLK must reduce its exposure to Apple and Microsoft while increasing its holdings in Nvidia. The rebalancing is necessary to maintain the fund’s weighted averages and avoid exceeding the 25% limit for any stock in the fund.

The rebalancing is expected to have a significant impact on the stock prices of both Apple and Nvidia. The sudden influx of buying and selling by the fund could put pressure on the prices of both stocks. Additionally, the recent stock split by Nvidia may impact the price dynamics following the rebalancing. On the other hand, the large sell-off of Apple shares could create a temporary weakness in its price due to a mismatch between supply and demand.

Overall, the rebalancing of XLK highlights the complexities of managing a diverse portfolio of stocks. The fund’s need to adjust its holdings in response to market dynamics underscores the challenges of maintaining a balanced and diversified investment strategy in the ever-changing technology sector.

Article Source
https://www.investopedia.com/usd70-billion-fund-will-likely-load-up-on-nvidia-stock-dump-apple-this-week-8663639