Can Nvidia reclaim its position as the world’s second-largest company by the end of this week?

The Technology Select Sector SPDR ETF (XLK) is grappling with significant concentration issues due to its top three holdings: Microsoft, Apple, and Nvidia.

The ETF has a concentration rule that limits the total weight of companies with a weight above 4.8% to no more than 50% of the fund’s holdings. Over the past two years, the immense sizes of Microsoft and Apple have consistently hit this limit, causing the smallest company exceeding the 4.8% threshold to be reduced to a 4.5% weight.

This rule has led to a notable discrepancy between the weights of Microsoft and Nvidia in the XLK ETF. Despite Microsoft’s market valuation being only $240 billion, or roughly 8% larger than Nvidia’s, Microsoft holds a 22.4% weight, Apple a 22.1% weight, and Nvidia a 5.7% weight in the ETF as of June 11.

A significant reshuffling could occur if Nvidia reclaims its position as the world’s second-largest company by the end of this week. Should Nvidia achieve this, its weight in the XLK ETF could soar to over 20%, while Apple’s weight would drop to just 4.5%. This adjustment could lead to an estimated $10 billion in buying for Nvidia stock and about $11 billion in selling for Apple stock, according to Bloomberg.

The ETF’s concentration limits have hindered its performance amid Nvidia’s rapid rise over the past year and a half. Nvidia’s current weight in the XLK ETF is just under 6%, compared to a 21% weight in the S&P 500 Information Technology Index, contributing to the ETF’s recent underperformance.

As of Wednesday morning, Nvidia needs to gain approximately $200 billion in market value to become the world’s second-largest company. If it reaches this milestone by Friday, it will trigger a $21 billion trade adjustment in the XLK ETF.

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