The usual rebalancing of the S & P 500 index and the exchange-traded funds around it is a quarterly event occurring Friday. Most of the time this attracts little, if any, attention. This time — thanks to the relentless rise of Nvidia , up nearly 45% this quarter alone — things are different. NVDA YTD mountain Nvidia’s performance in 2024 Gap between an index and the ETF that tracks it The S & P 500 has 500 large-cap stocks that are weighted by market capitalization. It is rebalanced every quarter to reflect additions, deletions and changes in share count due to buybacks. Some ETFs follow the broad market benchmark and others track the S & P 500 sector indexes, including technology. These sector ETFs also rebalance quarterly. But there is a difference. The S & P 500 indexes are pure indexes. They do not have any limit on the concentration of individual stocks. Nvidia could become 99% of the S & P 500 by market capitalization, and it would be reflected in the index. That is not the case with ETFs. These are investment funds. There are federal rules they must follow, dating back to the 1930s. Under these rules, no stock can be more than 25% of a fund’s exposure, and the combined weight of all stocks bigger than 5% cannot exceed 50% of the fund’s holdings. Normally, this is not an issue, as almost no companies have this kind of concentration. But things have changed a bit because three companies — Microsoft , Nvidia and Apple — have market capitalizations of about $3 trillion. This trio dominates the S & P 500 technology index. When the Technology Select Sector SPDR Fund (XLK) , the ETF that seeks to track the S & P technology index, was last rebalanced three months ago, the weightings were very different than they are today: SPDR Technology ETF (XLK) (current weighting in index) Microsoft 22.1% Apple 21.9% Nvidia 6.0% Broadcom 5.4% Here is the current weighting of the four largest stocks in the S & P technology index, as of last Friday: S & P Technology Index (weighting in index) Microsoft 22.0% Nvidia 21.8% Apple 20.6% Broadcom 5.1% Source: S & P Dow Jones Indices There is a problem here: The combined weight of the first three names is over 64%. So under the rules, there must be a rebalance. The rules say you have to cap the last security that breaks the 50% barrier. That would be Apple. So the weighting of Apple is going to be reduced to get the combined weighting of any stock above 5% below 50% of the combined weight, and Nvidia is going to increase. The new weightings look like this: SPDR Technology ETF (XLK) (new weighting in index) Microsoft 21.9% Nvidia 21.6% Apple 4.5% Broadcom 4.5% Source: SPDR Americas Combined, the first three stocks have a weighting of 48%. The goal is not to make it exactly 50%, Matthew Bartolini, head of SPDR Americas Research, told me. In this manner, the cumulative weight of stocks that account for at least a 5% share of the fund is kept below the 50% threshold. This can lead to unusual situations. Because of the rules on concentration, it is possible for an ETF that tracks the S & P technology index to diverge slightly from the index it seeks to track. This has not been a major problem in the past, but it could be if concentration gets even greater in the future. It’s all a bit confusing figuring out the numbers, but it makes sense when considering that many investors were burned by investment funds in the Great Depression. Regulators sought to limit concentration to protect investors. Still, a move in a company like Nvidia is rare. “This is an anomaly,” Bartolini told me. “We’ve never had three companies in the same sector with more than $3 trillion in a single sector. This is a byproduct of the concentration.”