3 Ways to Profit From the Special Nasdaq 100 Rebalancing

Nasdaq made an announcement regarding a Special Rebalance to address the excessive concentration of Big Tech stocks in the Nasdaq 100 index.

According to the Nasdaq 100 methodology, the combined weight of the top five companies are capped at 38.5%. These five companies (Microsoft, Apple, Amazon, Nvidia and Tesla) accounted for a combined weight of 43.8%. This suggests that these companies will experience noticeable reductions in their weightings.

As a result, the Magnificent 7 Big Tech stocks experienced a decline on Monday. Nvidia's stock fell by only 0.8%, while Apple slipped by 1.1% intraday. Microsoft retreated by 1.6%, TSLA by 1.8%, and Amazon by 2%. However, META's stock climbed 1.2% due to the successful adoption of their Threads app.

The announcement also impacts passive index ETFs like QQQ, which tracks the Nasdaq 100. These ETFs will need to sell stocks of the top five companies based on the new weights provided by Nasdaq.

Although the exact weights will be disclosed on Friday, the stock market has already begun factoring in this change, leading to potential investment opportunities.

The first opportunity arises if the Big Tech stocks experience significant selling pressure, providing investors with a chance to purchase them at more reasonable prices. This opportunity is the most apparent.

The second opportunity is less evident and involves examining the top 20 stocks, excluding the Magnificent 7. The Pareto principle suggests that 20% of stocks would command the majority of weightage in an index. Hence, it is likely that stocks outside the Magnificent 7 but within the top 20 will receive a greater share of the redistributed weights and enjoy subsequent buying pressure. These are the stocks: