It’s happening on Friday and will reduce the relative size of the largest constituents of that index. I’ve red a number of tortured, and basically incorrect, explanations of why this is happening–all coming from financial “expert” commentators who are showing that they’ve never managed an equity mutual fund in the US.

In its simplest form, the issue is this:

–federal securities laws limit the number of positions of 5% or more of its assets that a mutual fund that calls itself diversified (which is basically all of them) can have

–once a fund has reached this structural limit, the 5% (or 5%+) positions are free to grow as they may, and the fund can always sell, but it is not permitted to buy more of these stocks. For an index fund, this would mean, in effect, that it can’t invest any new money in the largest index members.

The more complicated version: in applying this diversification test, a mutual fund can exclude 25% of its assets (I have no idea what the rationale is). In the case of the NASDAQ 100, however, the two largest index constituents, MSFT and AAPL, already make up more than a quarter of the total market cap. Numbers three and four, NVDA and AMZN are about 7% of the index each, with the next two largest, TSLA and META, both approaching 5%. So we’re closer than one might imagine to triggering the diversification rule.

Hence, the upcoming restructuring of the index.