Nvidia Soars while Apple Stays Close Behind: A Closer Look at Index Weightings

As of this writing, Nvidia (NASDAQ: NVDA) has skyrocketed by 186.6% year-to-date, reclaiming its title as the world’s most valuable company, surpassing Apple and Microsoft. However, a 3.2% dip in Nvidia’s stock this past Friday brought Apple within striking distance of regaining the top spot.

For now, Nvidia continues to hold its position as the largest component of both the S&P 500 (SNPINDEX: ^GSPC) and the Nasdaq-100, which consists of the 100 largest non-financial firms in the Nasdaq Composite. Earlier this month, Nvidia was also included in the Dow Jones Industrial Average (DJINDICES: ^DJI), although it ranks 21st among the 30 Dow components, accounting for just 2.1% of that index.

How Index Structure Affects Company Influence

Nvidia’s relatively small role in the Dow, compared to its more significant impact on the S&P 500 and Nasdaq-100, stems from the different ways these indexes are calculated. The S&P 500 and Nasdaq-100 are both market cap-weighted, meaning that more valuable companies like Nvidia take up a larger share of the index. In contrast, the Dow is price-weighted, making the stock prices of its components the main driver of its index value.

This price-weighting method means that a company’s stock price fluctuations can heavily influence the Dow, regardless of its overall economic size. However, the Dow’s value can be adjusted via the Dow divisor, which is a figure that accounts for stock splits and other corporate actions, ensuring those events don’t significantly alter the index’s value on their own.

Nvidia’s recent addition to the Dow coincides with a 10-for-1 stock split earlier in the year. Without this split, Nvidia’s share price would exceed $1,400, which would have made it nearly 20% of the index, potentially skewing its balance. Interestingly, Amazon, Sherwin-Williams, and Nvidia are among the companies to join the Dow this year after completing stock splits in the past four years, reflecting a trend towards incorporating more tech companies in this index.

The Dominance of Tech Stocks in Indexes

For investors, understanding which companies are driving market movements is crucial. The top 10 holdings of major ETFs, including the Vanguard S&P 500 ETF (NYSEMKT: VOO), the Invesco QQQ Trust (NASDAQ: QQQ), and the SPDR Dow Jones Industrial Average ETF Trust (NYSEMKT: DIA), highlight how concentration in a few stocks can impact overall performance. Nvidia is the second-highest holding in the Vanguard ETF but is the top holding in the Invesco ETF, whereas it plays a lesser role in the SPDR Dow ETF.

Data sources: Vanguard, Invesco, State Street Global Advisors.

The performance of only a few stocks can greatly influence all three indexes. The Dow features 30 companies, and it’s notable that 56.3% of its weight is concentrated in just 10 stocks. Comparatively, the Nasdaq-100’s top 10 components account for 53.3%, leaving the rest to make up less than half the index. Even in the S&P 500, the top 10 companies represent 36.3% of its total weight.

Finding the Right Index Funds for Your Investment Strategy

Investing in index funds and ETFs is an effective strategy for entering the market with high-growth stocks like Nvidia while ensuring a diversified portfolio. Understanding how these indexes work allows investors to make informed decisions about where to allocate their money.