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Investors in the behemoth SPDR technology sector fund might be surprised to learn that until last week their exposure to Nvidia was roughly four times that of Apple, despite their comparable market values.
That disparity was costly for shareholders of the $70 billion State Street fund because Apple stock has outperformed Nvidia by 10 percentage points in the third quarter. And, it forced S&P Dow Jones Indices to tear up its rulebook to account for the growing might of the biggest tech companies.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| AAPL | APPLE INC. | 227.46 | -1.58 | -0.69% |
| MSFT | MICROSOFT CORP. | 416.32 | +0.48 | +0.12% |
| NVDA | NVIDIA CORP. | 134.80 | -0.01 | -0.01% |
| XLK | TECHNOLOGY SELECT SECTOR SPDR ETF | 230.81 | +0.40 | +0.17% |
The valuations of Apple, Microsoft and Nvidia, the three largest U.S. companies by market value, have soared above $3 trillion this year. Together, the companies make up more than 60% of the market value of the S&P 500’s information-technology sector—and that conflicts with fund-concentration rules that limit the combined contribution of the biggest companies to 50%.
Time has shown that passive investing, or tracking indexes, typically offers the best return for investors, while also limiting their risk. But the discrepancy within the SPDR fund—one of the world’s biggest exchange-traded funds—shows that it doesn’t always work the way investors expect. The rise of a handful of big tech stocks has changed the market in ways that few investors would have predicted even a decade ago.
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“The original rules had operated fine and fair for basically the entire life of these funds,” said Matthew Bartolini, head of Americas research for State Street’s SPDR ETF business. “What really brought this to public lexicon was the rise of Nvidia. This is the first time you’ve ever had three stocks with a market cap over $3 trillion in the same sector.”
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Under federal securities rules, no more than 25% of a fund’s assets can be invested in a single stock, and the sum of the weights of any companies that individually exceeded 5% of the fund’s assets can’t top 50%.
Jensen Huang, co-founder and CEO of Nvidia Corp., gives a talk in Taipei, Taiwan. (Annabelle Chih/Bloomberg via Getty Images / Getty Images)
To comply with the 50% rule, S&P had traditionally capped the weight of the smallest constituent with a greater than 5% weight until an index was back below the concentration threshold.
In early June, for example, Microsoft and Apple each had a roughly 22% weight in the SPDR fund, which tracks S&P’s tech sector index. Even though the market caps of the three companies were similar, Nvidia had just a 6% weight so that the 50% barrier wouldn’t be triggered.
Things got especially…
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