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XLK Weights

1 MSFT 23.5%
2 AAPL 20.0%
3 AVGO 4.6%
4 NVDA 4.4%
5 CRM 3.0%
6 AMD 2.8%
7 ADBE 2.4%
8 ACN 2.2%
9 CSCO 2.1%
10 ORCL 2.1%

Important Reminder – State Street’s Technology Sector ETF (XLK) has far less NVDA exposure than the company’s market cap suggests. Based on market cap alone NVDA should have a 16% weight in the fund, but rules and SEC requirements are causing this underweight in NVDA. Index and diversification rules cap NVDA’s weighting at 4.5% within the XLK, while MSFT and AAPL are both above 20%.

*Only $420B separates Apple AAPL and Nvidia NVDA this morning. So if NVDA is up 12% from here with AAPL off 6%, that’s a trigger. ALERT —  Will Goldman and a few hedge funds squeeze State Street into this trade? 

What if NVDA Surpasses AAPL Market Cap?

If NVDA surpasses AAPL in market cap, the $65 billion fund would have to sell perhaps $10bl of AAPL stock and buy $10bl of NVDA. NVDA’s $2.2TR market cap trails AAPL $2.6TR, but NVDA is gaining ground on AAPL after its frantic run in the last year. If NVDA overtakes AAPL in market cap for one of XLK’s quarterly rebalances, Apple will be capped at the 4.5% level and NVDA gets reweighted to 20%. His means approximately $10bl of XLK capital moving into NVDA and out of AAPL.

End of June

The S&P Select Industry Indices rebalance quarterly, and State Street follows this rebalancing methodology. In other words, the next quarterly rebalance comes up at the end of June.

“In 2021, the stock split was effective July 20th. From the earnings announcement until the stock split, NVDA increased by 40%, suggesting a lot of investors piled into the stock ahead of the split. Given the massive surge of NVDA over the last year, a repeat seems unlikely but NVDA would only need to appreciate by 20% ahead of the rebalance to overtake AAPL in the index reweight at the
end of June.” Bear Traps Report April 10, 2024.

In other words, as the Bear Traps Report noted in April when investors rush into the stock before the stock split becomes effective, and the stock overtakes AAPL by June 30, XLK may need to swap $10bl out of AAPL into NVDA. This sets up a recipe for a classic – front running-induced, near-term blow-off top.