In a significant development for the technology sector, one of the world's prominent technology Exchange-Traded Funds (ETFs) is set for a major rebalancing that would increase its exposure to Nvidia Corp. while reducing its holdings in Apple Inc. This rebalancing is expected to spur billions of dollars in trading volume.

State Street Global Advisors, the firm managing the $71 billion Technology Select Sector SPDR Fund (XLK), is on track to revamp the composition of the ETF after Nvidia's market value surpassed that of Apple on Friday. Despite Nvidia's impressive 166% gain year-to-date, XLK has held significantly fewer shares of the chipmaker compared to the S&P 500 Information Technology Index, where Nvidia has a 22% weighting.

The ownership cap imposed under diversification rules has caused XLK to underperform this year. However, unless there is an 11th-hour deviation from S&P Dow Jones Indices' established methodology, the ETF is expected to be retooled during the quarterly rebalance at the end of June.

Calculations shared by the index provider with market participants indicate that Apple and Nvidia would switch positions within the ETF. Apple's weight is anticipated to drop to 4.5% while Nvidia's weighting is expected to exceed 20%. This rebalancing would entail State Street purchasing $11 billion worth of Nvidia shares while selling off $12 billion of Apple shares, an estimate equivalent to the average daily trading value of Apple over the past three months.

According to Chris Harvey, head of equity strategy at Wells Fargo Securities, the realignment of the XLK ETF would align it more closely with the momentum trade and semiconductor sector. This could result in more funds flowing towards Nvidia, which is already performing strongly.

While S&P has the discretion to make exceptions, it is likely that the XLK ETF will adhere to the methodology and rules during the rebalance. S&P indicated in a note that it reserves the right to make exceptions if needed but will strive to keep clients informed about any deviations from the general rules.

The rebalancing is expected to attract significant attention from traders, who often take positions in anticipation of index rebalances. These adjustments in the weighting of Nvidia and Apple within the XLK ETF are driven by diversification rules set up over 80 years ago to protect investors from concentrated bets. XLK's methodology differs from other indexes, as it trims the smallest non-compliant stocks rather than proportionally reducing the top holdings.

The anticipated rebalance of XLK reflects the increasing market value of Nvidia, with the semiconductor company catching up to Apple and Microsoft Corp. in size in recent weeks. Wall Street is closely watching this rebalancing process due to its potential to induce volatility and affect some of the most closely followed tech companies globally.

Analysts are also considering the future rebalance in September, speculating that if Apple manages to surpass Nvidia or Microsoft in market value, it could trigger another major rebalancing in which billions of dollars' worth of Apple or Nvidia shares may be bought or sold.

The upcoming rebalancing of the XLK ETF highlights the evolving landscape of the technology sector and the continued rise of Nvidia as a major player, potentially reshaping the composition of the fund for the foreseeable future.