Funds with $350 billion are exposed to S&P’s new index-cap rules
Index-tracking stock funds with $350 billion in assets are due for a big revamp later this month, after S&P Dow Jones Indices retooled its rules to curb the dominance of the largest companies.
With the equity market getting increasingly top-heavy in the era of Big Tech, S&P will now reduce the weightings of the market leaders in proportion to their capitalization — in the event they get even bigger and breach size-related thresholds in key industry benchmarks, it said in a statement this week.
It’s a material departure from the current approach where the smallest of the group gets their weighting trimmed at first, when preset thresholds are triggered.
At issue is rising concentration risk this year. Investment managers are battling to ensure their exposures to a handful of booming technology companies don’t hit decades-old regulatory limits. But the new rules will have ripple effects far and wide — with the benchmark provider introducing the new capping initiative across its sector indexes tracking everything from consumer staples to energy and communications.
The incoming rule, adopted after a month-long consultation with market participants, means passive investment vehicles like Technology Select Sector SPDR Fund will need to shuffle their holdings accordingly at their next quarterly rebalance.
When the changes in the S&P’s capping methodology take effect at the market close on Sept. 20, Piper Sandler & Co. estimates $31 billion of trades will be unleashed across major ETFs, with roughly half of that coming
