Macro
Nvidia Surpasses Apple, Triggers $67B XLK ETF Shakeup
Nvidia's rise could lead to $10 billion in Nvidia buys and $11 billion in Apple sells in $67 billion XLK ETF.
Key Takeaway
- Nvidia surpassing Apple in market value could lead to a major reshuffle in the $67 billion XLK ETF, significantly increasing Nvidia's weight.
- State Street Global Advisors may need to buy $10 billion of Nvidia shares and sell $11 billion of Apple shares due to diversification rules.
- This shift could make XLK more semiconductor and momentum-oriented, altering its trading characteristics.
Nvidia's Meteoric Rise
Nvidia Corp. has recently surpassed Apple Inc. in market capitalization, a development that could significantly impact one of the world's largest tech ETFs, the $67 billion Technology Select Sector SPDR Fund (ticker XLK). Nvidia's current representation in XLK is approximately 6%, compared to 21% for the S&P 500 Information Technology Index. This disparity has led to XLK underperforming this year. As Nvidia continues to soar, its weight in XLK could see a substantial increase during the ETF's quarterly rebalance at the end of this month, provided Nvidia maintains its edge over Apple on the reference date.
Implications for XLK
The potential reshuffling in XLK could result in State Street Global Advisors, the fund's manager, purchasing around $10 billion worth of Nvidia shares while selling approximately $11 billion of Apple shares. This adjustment is driven by diversification rules established to protect investors post-Great Depression, which limit the impact of any single stock within the fund. "If Nvidia is larger on the reference date, they will have to flip the weights and sell Apple," said Bloomberg Intelligence analyst James Seyffart. This rebalancing could significantly alter the characteristics of XLK, making it more semiconductor and momentum-oriented, as noted by Chris Harvey, head of equity strategy at Wells Fargo Securities.
Historical Context and Future Projections
Nvidia's rise is part of a broader trend where dominant tech companies gain increasing weight in market indices. Evercore ISI's semiconductor analyst Mark Lipacis suggests that Nvidia could eventually represent 10-15% of the S&P 500, a level of influence unprecedented in the index's history. Nvidia's market value has surged over 200% in the past 12 months, pushing its current weighting in the S&P 500 to 6.6%, just behind Microsoft's 7% and ahead of Apple's 6.4%. Lipacis argues that Nvidia's ecosystem of parallel processing chips, software, hardware, and networking positions it to dominate the current computing era, much like past tech giants in their respective eras.
Street Views
James Seyffart, Bloomberg Intelligence (Neutral on XLK):
"If Nvidia is larger on the reference date, they will have to flip the weights and sell Apple. They will do whatever is required by the rules. They were being forced to make even larger relative sales of a stock in the past."
Chris Harvey, Wells Fargo Securities (Neutral on XLK):
"The potential switch of sizing up of Nvidia and sizing down of Apple would make a very significant characteristic change to XLK. We will have an ETF that is more semis-oriented and more momentum-orientated. It is changing the characteristic, which means it may change the way the ETF trades."
