One of the world’s most popular indices faces a shake-up that could impact millions of UK investors. The Nasdaq 100 has romped more than 44% higher this year – including its best first half ever, beating even the dotcom bubble of the late 1990s.

The seemingly unstoppable rally is largely thanks to the frenzy for everything AI (artificial intelligence), sparking an investor surge for big tech stocks that has left the high-growth benchmark overly concentrated in just a handful of names.

Now, the index’s overseer is acting in a bid to check the influence of the largest stocks and to ease the pressure on index funds from falling foul of concentration risk rules.

In the US, the stock market watchdog, the Securities Exchange Commission, forbids funds’ largest stakes (those over 5% of portfolio assets) from making up more than 50% of total assets to ensure reasonable diversification. Funds in the UK and elsewhere adhere to similar rules.

The tech-heavy Nasdaq 100 will undergo a rare ‘special rebalance’ with changes taking effect at the opening bell on 24 July. According to the index’s complicated rules, a special rebalance may be conducted to address overconcentration, essentially by redistributing the stocks’ weights.

The ‘special rebalancing’ will not remove companies from the index or add new ones, it will simply rejig the underlying weights of the existing ones, lowering the weights of the biggest stocks and increasing ones with less index influence.

This matters to potentially millions of investors because so many invest in the Nasdaq 100 benchmark through ETFs. According to data from Barclays, the Invesco EQQQ Nasdaq 100 (EQQQ) was the fourth most bought ETF in the first week of July, accounting for more than 3% of ETF fund inflows.

In the wake of 2023’s vigorous AI-driven rally, the seven biggest tech firms – Microsoft (MSFT:NASDAQ), Apple (AAPL:NASDAQ), Alphabet (GOOG), Nvidia (NVDA:NASDAQ), Amazon (AMZN:NASDAQ), Meta Platforms (META:NASDAQ) and Tesla (TSLA:NASDAQ) – account for nearly 55% of the Nasdaq 100 index weighting, based on data from Invesco.

Collectively, shares in these seven companies have averaged gains of more than 105% this year to 14 July.

This will be the Nasdaq 100’s third weightings reshuffle in 25 years, the benchmark having been rebalanced in 1998 and 2011, according to Cameron Lilja, vice president and global head of index product and operations at Nasdaq.

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