2022-07-29

Apple Pop, Prepare for Drop

As discussed back in February, Apple and Microsoft were hitting their SEC-regulated natural limits in some growth funds. Long story short, even passive funds tracking indexes such as Russell 1000 Growth will be forced sellers of Apple or forced sellers of other holdings to stay within SEC rules. Rules are quarterly, percent of days in compliance, so August 15 or thereabouts is a date after which they have to be adjusting if they've drifted out of compliance.

Fund managers use modeling to try and track the index without replicating it, but it becomes harder when they are limits on what they can own. However, the main point remains: managers tracking the Russell 1000 Growth Index (IWF is an tracking ETF), either directly or as a benchmark, have almost no room to overweight Apple if they're tracking it. If Apple's weight increases because other stocks fall more than Apple, they have to sell Apple to stay in compliance.
Apple has a gap at $174 and change, I think that is the limit of upside risk. I took a short-term position against Apple this morning, with near-term options, assuming the market pulls back from here. Will assess going forward, but I will be looking to open a larger position out towards the September-October timeframe. The ratios are peaking, but if the overall market goes higher, Apple can go higher without lifting its ratio.

2 comments:

  1. Thanks for the great insight as always. Question, how does an ETF like XLF get around this? I see the top two holdings AAPL 21.5% and MSFT 20.4%. Everything else is below 5%. But this seems to show you can heavily weigh your top holdings, in this case two stocks makeup 40%.

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    1. If you click through to the linked article, "Why Some Fund Managers Have to Bet Against Apple and Microsoft Stock" it explains in some detail. A fund cannot hold more than 5% in a stock, for 75% of the portfolio. Funds can get away with 40%-plus as long as e.g. Apple is below 25%, because then they can allocate more than 5% to the next stock. However, I believe another limit kicks in at 50% of assets, or maybe it's that no single holding can exceed 25%. The tech-heavy sector funds XLY, XLC and XLK all have 40%+ in their top-two holdings.

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