June S&P 500 Index Rebalance: Technology Gains as AI Continues to Dominate

The S&P 500 quarterly rebalance added Crowdstrike, a cybersecurity firm with technology backed by artificial intelligence, underscoring the continued dominance of artificial intelligence.

Every quarter, S&P-Dow Jones rebalances its flagship market-capitalization index series, including the S&P 500 Index. Changes to the index related to the rebalance may appear small but they drive significant trade volumes in the market from the announcement date (June 7 by S&P-Dow Jones) and leading up to the effective date of the changes, which is the market close on June 21. According to S&P estimates, about $11 trillion in assets track the flagship S&P 500, with a large portion of that in passive assets. All investors should be aware of these changes but they are particularly important for index managers, who are tasked with tracking indexes with a high level of precision.

Rebalance periods at Northern Trust Asset Management, one of the world’s leading managers of index assets¹, demand a significant amount of collaboration across our investment team. This is especially true in the second quarter, with multiple major index rebalances happening within a few weeks of each other, including from FTSE Russell and MSCI. For all our index portfolios benchmarked to the S&P indexes, we must carefully manage the rebalances to help achieve our primary objective of matching the risk and return characteristics of the benchmark.

Key Changes: Crowdstrike and KKR Added

This quarter’s index rebalance was notable for the addition of Crowdstrike (see Exhibit 1), a cybersecurity firm, with a weighting of 0.19% in the index. This underscored the continued dominance of companies related to artificial intelligence (Crowdstrike’s security is backed by artificial intelligence) and reinforced the ongoing trend of S&P-Dow Jones adding companies directly to their large cap index, which also happened in three of the previous four quarterly rebalances. The S&P 500 continues hitting new highs with technology and AI-related companies leading the way.

The second significant addition was investment firm KKR, with a weighting of 0.16%. Both Crowdstrike and KKR are large names, with benchmark market caps of $86 billion and $73 billion, respectively. These are well above the $33 billion median market cap of the S&P 500.

Overall, the total trade size for this second quarter rebalance was much larger than in the first quarter and one of the largest in the last several years.

EXHIBIT 1: LARGE NEW ADDITIONS

The addition of security software company Crowdstrike and investment firm KKR are large names, with market caps of $86 billion and $73 billion, respectively, represents a recent trend of large direct additions to the index.

_{Source: Index data from S&P-Dow Jones as of June 7, 2024. Volume and performance data from FactSet and Bloomberg from June 7 to June 21. Relative trading volume is the daily trading volume on June 21 versus the average 60-day daily trading before June 7. Index holdings are provided for information only and should not be construed as a recommendation of any security. It is not possible to invest directly in any index. Past performance is not indicative of future results.}

Sector Impact: Information Technology Leads

The rebalance also somewhat changed the sector composition of the index, as shown in Exhibit 2. The rise in information technology’s weighting dwarfed nearly all of the others, while healthcare dropped the most. Besides CrowdStrike, GoDaddy, a website hosting company, also boosted information technology. The removal of Illumina, a biotech company, contributed to a dip in the health care sector. Within the information technology sector, the software industry led in terms of weighting gains.

EXHIBIT 2: INFORMATION TECHNOLOGY DOMINATES SECTOR CHANGES

The rise in information technology’s weighting dwarfed nearly all of the others, while healthcare dropped the most with the loss of biotech company Illumina.

median forward 12-month total return

_{Source: S&P-Dow Jones, as of June 7, 2024}

Performance Analysis: Adds Outperformed Deletes Since Announcement

As expected, we observed substantial trading during the rebalance period from June 7 to June 21. The index additions surged on the first trading date after the June 7 announcement, led by KKR returning 11.2% and CrowdStrike returning 7.3%. Both handily outperformed the deletions on that same trading day. This performance differential, or spread between the adds and deletes, carried through for the entire period from announcement to effective date, although it was relatively flat after June 10. Further, isolating the performance on just the effective date, June 21, adds underperformed the deletes, with all three additions down for the day despite an afternoon rally from CrowdStrike and KKR.

Excluding the adds and deletes, weighting increases and decreases in the index, which includes companies with share and float changes, differed in their performance. Over the entire period from announcement to effective date, decreases outperformed increases, resulting in a slightly negative spread over the observation period. However, on the effective date, increases outperformed the decreases, creating positive spread between stocks with up-weights versus down-weights.

EXHIBIT 3: ADDS OUTPERFORMED THE DELETES

Added companies easily outperformed deleted companies during the entire rebalance period, but notably deletes outperformed the adds on the final trading day. Further, companies with weighting decreases outperformed those with increases, though the gap closed significantly on the last day.

median forward 12-month total return

_{Source: S&P-Dow Jones, Bloomberg, Northern Trust Asset Management.}

What the Rebalance Means to Investors and Index Managers

The June rebalance, with large additions like Crowdstrike and KKR, requires close examination and precise implementation. This is reinforced by the fact that this rebalance is among the first to take place following the May 28 requirement by the Securities and Exchange Commission for brokers to settle transactions in one business day, down from two.

Given the amount of assets that track the S&P 500, trading volume increased significantly for the added and deleted companies, along with stocks with share and/or float changes.

Attentive analysis is crucial to understand how an impending index rebalance will shape the index, and by extension, the portfolios that track it. We believe this requires a careful review of liquidity conditions, expected trade flows and optimal trade strategies. The aim for portfolio managers is to keep tracking error to a minimum while mitigating the market impact and trading costs related to rebalancing do not erode wealth over time.

¹5th largest index manager according to Pensions & Investments’ Special Report on the Largest Money Managers released June 12, 2023. The ranking is based on total worldwide assets under management as of December 31, 2022. Past performance is not indicative of future results.

IMPORTANT INFORMATION

Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.

For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. This information may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.

Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For U.S. NTI prospects or clients, please refer to Part 2a of the Form ADV or consult an NTI representative for additional information on fees.

Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.

Not FDIC insured | May lose value | No bank guarantee