Invesco QQQ: The Rebalance in July 2023
The Invesco QQQ, by far one of the most known ETFs in the world, has just been rebalanced on July 24th.
As for most ETFs, QQQ gets rebalanced automatically once per year, namely the weight of the single holdings and possibly the holdings themselves get changed. But this time, Nasdaq decided to make a special rebalance. So why is that?
As Nasdaq itself describes it in the index methodology, a special rebalance can be done by redistributing the weights when there is an overconcentration of some stocks in the index.
This is exactly what happened this year. Why? Tech stocks have been growing immensely in 2023:
The 5 biggest stocks within QQQ – Apple, Microsoft, Nvidia, Amazon and Tesla – have grown respectively 55%, 47%, 219%, 50% and 145% Year To Date. This was mostly due to a combination of a (slowly) expanding U.S. economy, a slowdown of the rate hikes by the Fed, almost 2 years of bear market and the excitement for the AI on tech stocks.
All of this pushed QQQ and its benchmark, the Nasdaq 100 index, up over 43% so far this year:
Nasdaq 100 Index: What caused the Rebalance?
Why was a special rebalance necessary? The published index methodology of Nasdaq 100 describes 3 criteria that must be followed within the Index:
- No security weight may exceed 14% of the index;
- The sum of the 5 top securities may not exceed 38.5%;
- No security beyond the first 5 may have a weight exceeding 4.4% and the weight of the first five by market capitalization.
Comparing these criteria to the top 10 holdings of QQQ as of July 12th, one week after the news about the rebalance, you can see that the first point is actually met: no stock exceeds 14% of the index. With the second point, that says that the 5 largest stocks together must not exceed 38.5%, we have a problem. If you sum Microsoft, Apple, Alphabet considering Class A and C together, NVIDIA and Amazon, you get nearly 46% of the index. These are the stocks whose collective weight is going to have to be reduced to 38.5%.
The third point says that stocks beyond the top 5 must get capped at 4.4%. As of July the 12th, Tesla and Meta were both right at that limit but between then and the day of the rebalance they actually lost value. So they haven’t been an issue.
In this graph you can clearly see how much the concentration of the top 10 holdings has increased since 2002 in QQQ, and you can see it went from around 40% to almost 60%:
The “New” Nasdaq 100
Here’s how the Nasdaq 100, hence also QQQ, looked before and after the rebalance:
The biggest cuts occured in Microsoft and NVIDIA, which lost nearly 3% each. Consider, though, that part of the reduction in Microsoft’s weight has been simply due to a price drop. Amazon and Tesla lost more than 1% each, although just as I said for Microsoft, Tesla’s drop actually has more to do with the fact that the stock dropped around 10% from its peak before the rebalance following its quarterly earnings report. Alphabet fell from 7.2% to 5.5% of the index when you combine Class A and C.
Apple? well, Apple is too much of a great company to lose anything.
Broadcom and Pepsico saw a little increase of around 0.5-0.6%, and all the other companies beyond the top 10 saw some small modification that is not worth mentioning.
How much are you impacted from this Invesco QQQ Rebalance?
So let’s get to the most important part, which is the impact of this rebalance if you possess QQQ.
First of all, if you invested in QQQ, or maybe QQQM, and you did it for tech exposure, you don’t have to worry. Roughly 58% of the index is still allocated to tech and 19% to consumer discretionary. We had 61% before so the change in tech isn’t really a big deal.
Nevertheless, some of you might be disappointed by the fact that the Tech Sector was going so well so far and now has been reduced. Well, as Ray Dalio says, in finance if you want to be successful you need to be able to always do the opposite of what your instincts say. This means not following the mainstream and in this case specifically “buy low, sell high”.
I know this sounds obvious, but believe me, most investors end up doing the opposite.
What Nasdaq did to the index, that reflected on the Invesco QQQ, is exactly what every good investor should do. And the fact that it changed in the index itself, and you didn’t have to do it yourself, is one of the great advantages of ETFs because you are not forced to pay capital gain taxes because you’re not personally selling stocks.
The ETF does it for you.
QQQ For European Investors: EQQQ
And if you are from Europe and you are interested in investing in QQQ, don’t worry.
You can invest in EQQQ, which is the identical equivalent of QQQ and grew pretty much in the same way since the beginning:
The only bitter thing you need to accept is that the expense ratio of the european version is going to be higher, growing to quite annoying 0.30% compared to an already high 0.20% of the american ETF.
If you are interested in finance, you should absolutely check out my Youtube Channel, where you’ll find new videos about finance and investing every week.
Have a great day!
