The Nasdaq-100® underwent a “Special Rebalance” in July, but what does that mean for advisors and investors looking to capture the top-performing tech companies this year? The following is a guide to why the rebalance became necessary and the changes the Index underwent.
The remarkable performance of technology mega-cap companies this year led to pronounced concentration in major equity indexes. Chief amongst those was the Nasdaq-100® which tracks the 100 largest non-financial securities traded on the Nasdaq exchange.
The Nasdaq has been the Index to watch this year. As of July 24, when the rebalance went into effect, the Nasdaq-100 was up 41.21%. It’s been fantastic for tech investors but problematic for the Index’s market-cap-weighted methodology. Because the outperformance has been largely carried by just a handful of names, concentration became pronounced in the Nasdaq-100, which triggered the need for the special rebalance. Despite a tough August, which returned just 0.1% for, the Index, year-to-date it was up 34.1% as of August 31.
Breaking Up Concentration Risk in Tech
Going into the rebalance, the top seven companies (Microsoft, Apple, NVIDIA, Amazon, Meta, Tesla, and Alphabet) collectively comprised around 55% of the Index. Post-rebalance, the top seven (minus Alphabet and adding in Broadcom) make up just 40% of the Index.
The rebalance kicked in for two main reasons. According to the Index’s methodology, the weight of the top 5 securities combined cannot exceed 38.5%. Before the rebalance, the top five made up around 45%. Secondly, securities outside the top five cannot have a weight exceeding 4.4%. Meta and Tesla, fifth and sixth by weight, both hovered near 4.4%.
The rebalance sent Microsoft (previously 12.67% on July 10) from the top position by weight to solidly second at 9.84% as of July 24. NVIDIA also received a significant cut, dropping from 6.97% on July 10 to 4.23% on July 24. Alphabet’s collective weight between GOOGL and GOOG also dropped from 7.2% to 5.5% over the same period.
Though the Index is now less concentrated in just the top seven names, it still carries similar sector weighting as before, with a heavy emphasis on information technology, followed by consumer discretionary.
Invest in the Nasdaq-100 and Enhance Income With NUSI
Advisors seeking to capture the income potential in tech in the second half should look to the Nationwide Nasdaq-100® Risk-Managed Income ETF (NUSI). NUSI is an actively managed fund that follows a proprietary, systematic, rules-based options trading model.
It seeks to generate high current monthly income and utilizes a replication strategy to invest in stocks included in the Nasdaq-100® Index. The Nasdaq-100® Index consists of 100 of the largest non-finance securities traded on the Nasdaq exchange. The Index is rules-based and market-capitalization-weighted.
NUSI utilizes a collar strategy to seek to provide monthly income. The strategy also seeks to reduce volatility and offer a measure of downside protection. A collar strategy entails holding shares of underlying securities. At the same time, the strategy buys protective put options and writes calls for the same security.
A put option gives its owner the right but not the obligation to sell the underlying asset at a strike price on a set day until the expiration of the call. In contrast, a call option gives its owner the right but not the obligation to buy the asset at the strike price until the put expires.
The options collar is intended to reduce the Fund’s volatility and provide a measure of downside protection. It also seeks to hedge via the protective puts while generating income from the premiums earned from selling covered calls. Options that the Fund buys and sells generally expire one month from when they were purchased or sold. Options are also rolled the day before expiration on the third Friday of each month.
NUSI has an expense ratio of 0.68%.
For more news, information, and strategy, visit the Retirement Income Channel.
This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
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Nasdaq-100® Index: A rules-based, market capitalization-weighted index of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. The Index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.
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