Why does it happen?
The Nasdaq-100 Index is set to undergo its annual rebalancing on Monday, July 24th, 2023. This mid-year rebalancing aims to update the composition of the index to better reflect the 100 largest non-financial companies listed on the Nasdaq stock exchange.
The Nasdaq-100 tracks the 100 biggest non-financial stocks on the Nasdaq across major sectors like technology, consumer services, healthcare and more. Top companies in the index include Apple, Microsoft, Amazon, Tesla, Meta, Alphabet, Nvidia and Netflix.
To qualify for the Nasdaq-100, companies must meet market capitalization, liquidity, domicile and sector classification requirements set by Nasdaq. The rebalance captures the 100 largest eligible securities to make the index representative of leading Nasdaq stocks.
Based on eligibility rules, analysts predict that companies like $AMD , Zoom ( $ZM ), Datadog ( $DDOG ) and Moderna ( $MRNA ) may join the ranks of the Nasdaq-100, potentially replacing stocks like Norwegian Cruise Line, Fox Corporation, Cerner and Tripadvisor.
Why it matters
In general, stocks added to the index tend to see 3-6% short-term boosts from increased buying and visibility. Stocks removed face selling pressure and may fall 3-5% around the announcement. For example, when Facebook was added to the Nasdaq-100 in 2013, its shares rose over 4% on the announcement day and saw heavy trading volume as index funds bought shares.
In 2016, NetApp gained 6% on the day it was added to the index while Keurig Green Mountain fell over 5% on its deletion.
So it is likely that companies like $AMD and $MRNA might increase in value in the short term, especially if NASDAQ recovers from yesterday's losses, and companies like Tripadvisor may draw the short stick.