Home etftrends.com An Advisor’s Guide to the Nasdaq-100® Rebalance

An Advisor’s Guide to the Nasdaq-100® Rebalance

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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Click here for Fund Details, including the top 10 holdings – https://nationwidefinancial.com/products/investments/etfs/fund-details/NUSI

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Call 800-617-0004 to request a summary prospectus and/or a prospectus, or download prospectuses at etf.nationwidefinancial.com. These prospectuses outline investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.

The results shown represent past performance; past performance does not guarantee future results. Current performance may be lower or higher than the past performance shown, which does not guarantee future results. Share price, principal value and return will vary, and you may have a gain or a loss when you sell your shares. Returns for periods less than one year are not annualized. Short-term performance, in particular, is not a good indication of the Fund’s future performance, and an investment should not be made based solely on returns. To obtain the most recent month-end performance, go to etf.nationwidefinancial.com or call 1-877-893-1830.

Click this link for the funds’ Standardized performance and 30-day SEC yield.

KEY RISKS: The Fund is subject to the risks of investing in equity securities, including tracking stock (a class of common stock that “tracks” the performance of a unit or division within a larger company). A tracking stock’s value may decline even if the larger company’s stock increases in value. The Fund is subject to the risks of investing in foreign securities (currency fluctuations, political risks, differences in accounting and limited availability of information, all of which are magnified in emerging markets). The Fund may invest in more-aggressive investments such as derivatives (which create investment leverage and illiquidity and are highly volatile). The Fund employs a collared options strategy (using call and put options is speculative and can lead to losses because of adverse movements in the price or value of the reference asset). The success of the Fund’s investment strategy may depend on the effectiveness of the subadviser’s quantitative tools for screening securities and on data provided by third parties.

The Fund expects to invest a portion of its assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses and because the Fund may not be invested fully in the securities of the Index or may hold securities not included in the Index. The Fund frequently may buy and sell portfolio securities and other assets to rebalance its exposure to various market sectors. Higher portfolio turnover may result in higher levels of transaction costs paid by the Fund and greater tax liabilities for shareholders. The Fund may concentrate on specific sectors or industries, subjecting it to greater volatility than that of other ETFs. The Fund may hold large positions in a small number of securities, and an increase or decrease in the value of such securities may have a disproportionate impact on the Fund’s value and total return. Although the Fund intends to invest in a variety of securities and instruments, the Fund will be considered nondiversified. Additional Fund risk includes: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.

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.

Nasdaq® and the Nasdaq-100® are registered trademarks of Nasdaq, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by Nationwide Fund Advisors. The Nationwide Nasdaq-100® Risk-Managed Income ETF (“NUSI”) has not been passed on by the Corporations as to their legality or suitability. NUSI is not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT.

Nationwide Fund Advisors (NFA) is the registered investment advisor to Nationwide ETFs, which are distributed by Quasar Distributors LLC.  NFA is not affiliated with any distributor, subadviser, or index provider contracted by NFA for the Nationwide ETFs.  Representatives of the Nationwide ETF Sales Desk are registered with Nationwide Investment Services Corporation, member FINRA, Columbus, Ohio.

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