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Nasdaq 100 plans special rebalance to curb dominance of magnificent seven
That's really interesting. I'm familiar with reconstitutions (adding or deleting) but not shifting away from market capitalization. I'm curious to see what things look like after the changes.
A special rebalancing, which is part of Nasdaq 100's methodology to maintain compliance with a U.S. Securities and Exchange Commission rule on fund diversification ...
The special rebalancing may be conducted at any time if the aggregate weight of companies, each having more than 4.5% weight in the index, tops 48%
This is to meet a 50% requirement: add together all holdings with weights over 5%, and they must total under 50% of the fund's assets. But this requirement is found in the Internal Revenue Code, not in an SEC fund diversification rule.
From the SEC site:
In addition to the diversification test under section 5 of the [1940 Investment Company] Act, many investment companies also seek to satisfy the Internal Revenue Code’s (“the Code”) diversification test to qualify as a regulated investment company (“RIC”).
...Funds generally elect to be treated as RICs under section 851 of the [Internal Revenue] Code in order to take advantage of pass-through tax treatment.
Funds tracking the Nasdaq 100 index don't need to satisfy the SEC diversification rule because they declare themselves nondiversified.
According to the NASDAQ 100 methodology, "a special rebalancing of the Index may be conducted at any time if it is determined necessary to maintain the integrity of the Index."
Otherwise, the index is rebalanced at most quarterly. Each quarter a rebalancing is triggered if the index is close to violating the 50% rule, or close to violating a separate 25% rule (not more than 25% of a fund may be invested in a single security).
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EXPLAINER-What is Nasdaq's special rebalancing and its impact?
From the SEC site: https://www.sec.gov/files/staff-report-threshold-limits-diversified-funds.pdf
Funds tracking the Nasdaq 100 index don't need to satisfy the SEC diversification rule because they declare themselves nondiversified.
According to the NASDAQ 100 methodology, "a special rebalancing of the Index may be conducted at any time if it is determined necessary to maintain the integrity of the Index."
Otherwise, the index is rebalanced at most quarterly. Each quarter a rebalancing is triggered if the index is close to violating the 50% rule, or close to violating a separate 25% rule (not more than 25% of a fund may be invested in a single security).
Nasdaq 100 methodology (See Section 5.1)