Nvidia shares may see buying worth $11 billion from most prominent technology ETF

While State Street may purchase $11 billion worth of Nvidia's shares, it will have to sell shares worth $12 billion in Apple as per an estimate.

Shares of Nvidia Corp. have rallied 171% so far in 2024. After such a rally, the stock may see buying worth another $11 billion as one of the world's most prominent technology Exchange Traded Funds (ETFs) is set for a big rebalancing exercise, which would lead to an increase in the exposure towards the chipmaker.
State Street Global Advisors, which manages the $71 billion Technology Select Sector SPDR Fund (XLK), is set to revamp the composition of the fund towards the end of the June quarter, barring a last-hour change from the methodology set out by the index provider S&P Dow Jones.

During the last rebalance, Nvidia made up nearly 6% of the ETF assets, compared to the 22% weightage it had in the S&P 500 Information Technology index. If the quarterly rebalance does take place, Nvidia's weightage is likely to rise above 20% in the ETF, while that of Apple Inc. may fall to 4.5%, from 22% earlier, according to calculations sent by the Dow Jones to Bloomberg.

While State Street may purchase $11 billion worth of Nvidia's shares, it will have to sell shares worth $12 billion in Apple as per an estimate. The projected sale of Apple shares is equal to the average daily trading value in the last three months.

Matt Bartolini, head of SPDR Americas Research at State Street, said XLK will rebalance according to its rules and methodology. The ETF is obliged to track the S&P benchmark and is designed to stay in compliance with the diversification regulations.

The index committee “reserves the right to make exceptions when applying the methodology if the need arises,” S&P wrote in a note regarding the June rebalance. “In any scenario where the treatment differs from the general rules stated in this document or supplemental documents, clients will receive notice, whenever possible.”

As per the rules, the combined representation of the largest companies — those making up roughly 5% or more of a diversified fund — can’t add up to more than 50%. This rule is the reason why XLK has under-owned Nvidia and failed to capitalise on the stock's outperformance. As a result, the XLK has underperformed the broader S&P 500 Tech Index by 5 percentage points between April and June, the widest margin since 2001.

“I am interested to see if they keep the rules the same through the next rebalance in September,” said James Seyffart, ETF analyst at Bloomberg Intelligence. “If Apple manages to surpass Nvidia or Microsoft by the next rebalance reference date — which is September 13 — we could have a mirror image massive rebalance where Apple is bought to the tune of billions and Nvidia or Microsoft are sold to the tune of billions.”