Benzinga - by Zacks, Benzinga Contributor.
The Technology Select Sector SPDR Fund (ARCA:XLK), the second-largest ETF in the sector, is poised for a big rebalance this week. This shake-up will increase the exposure to NVIDIA Corp. (NASDAQ: NVDA) at the expense of Apple Inc. (NASDAQ: AAPL).
A Major Shift The change comes as NVIDIA has been on a relentless rally, driven by its prominence in the artificial intelligence space. The stock has surged 164% so far this year and surpassed Apple in market value earlier this month. If NVIDIA maintains its position as the world's second-largest company by the end of this week, then XLK will increase its allocation in NVIDIA stock to more than 20% and drop its allocation of Apple to just 4.5%. The shift will create a $10 billion trade to buy NVIDIA stock and about an $11 billion trade to sell Apple stock, according to Bloomberg.
Currently, the XLK ETF is heavily weighted toward its top holdings, which include Microsoft, Apple and NVIDIA. As of Jun 11, 2024, Microsoft had 22.4% weight in the ETF, Apple 22.1% and NVIDIA 5.7%. Notably, all three stocks are worth more than $3 trillion amid an ongoing AI boom. Due to concentration limits, the fund must ensure that the sum of companies with a weight of above 4.8% does not exceed 50% of its total holdings.
The concentration limits have weighed down the performance of XLK in recent months despite the meteoric rise in NVIDIA shares. In fact, XLK has underperformed the S&P 500 Information Technology Index, which has 21% weighting in NVDA, by 5 percentage points between April and June, the widest margin since 2001.
XLK tracks the Technology Select Sector Index, which is technically not a market cap-weighted index but a "modified" market cap-weighted index. This usually means that it can put certain caps or guidelines around the portfolio weighting methodology to address potential issues, such as overconcentration.
Though NVIDIA and Apple will swap their places in the XLK portfolio, the number of stock holdings will remain at 65. Industry-wise, the ETF currently has the largest allocation in software, semiconductors & semiconductor equipment, and technology hardware, storage & peripherals. The fund has AUM of $71.1 billion and charges 9 bps in annual fees.
New XLK Offers Growth Opportunities The change will provide a huge boost to XLK, capitalizing on the AI-fueled NVIDIA surge. The fund will continue to gain from strong sector fundamentals. The expansion of AI applications holds the promise of ushering in fresh opportunities for growth within the sector. According to a new report by Grand View Research, the global artificial intelligence market is expected to witness a CAGR (2024-2030) of 36.6% to reach $811.75 billion by 2030.
The Fed, in its latest meeting, penciled in one rate cut for this year and foresees four cuts in 2025. The central bank has altered the language in its statement, noting that there has been "modest further progress toward the committee's 2% inflation objective." Previously, the statement pointed to a "lack" of further progress. This signals a period of higher interest rates for a while. Tech titans have shown strong resilience amid such a scenario. And, when the Fed starts cutting rates later this year, technology stocks will receive a boost. As the tech sector relies on borrowing for superior growth, it is cheaper to borrow more money for further initiatives when interest rates are low.
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