ETF rebalancing is upon us. Let's talk about what that means for over or under performers!

I will mainly discuss SMCI in this post. As it stands, SMCI is trading at $905.48 and has a market cap of $50.65 billion USD.

Currently, SMCI is trading in the Russell 2000 (RUT). It is the highest cap stock in the RUT by about 300%. This disparity is why I believe that joining the S&P 500 is a death sentence to the stock price, and the downwards pressure and volatility will happen extremely quickly once it is added. I will explain why.

The majority of investors nowadays invest their money passively through retirement accounts/401k's or just are told that their money is safer if you put it into ETFs. This results in a MASSIVE amount of inflow into a basket of stocks without much/any DD discerning the individual stocks in the basket. As for market cap weighted indices/ETFs, the percentage of that index is based on the market cap of the stock.

If I put $1,000 into the RUT, as it currently stands, $1.62 of that will be towards SMCI, while the next highest stock, MSTR, will receive $0.51. As SMCI increases in market cap, even more of the inflow into the RUT will get pumped passively into SMCI. This is a self-perpetuating cycle of inflow into the highest capped stock(s) in the index. $Super Micro Computer(SMCI.US)$ $NVIDIA(NVDA.US)$ $Advanced Micro Devices(AMD.US)$