In response to Nvidia's impressive performance and ascension as the world's most valuable company, the $72.34 billion Technology Select Sector SPDR Fund (XLK) is set to significantly bolster its investment in Nvidia while reducing its exposure to Apple. The fund's decision comes as it aligns its holdings with the impending changes to the S&P Dow Jones Technology Select Sector index.

Managed by State Street Global Advisors, the XLK fund will acquire approximately $10 billion worth of Nvidia shares as it adjusts its portfolio. Matthew Bartolini, the head of SPDR Americas research at State Street, confirmed that the reshuffle aims to bring the fund's holdings in line with the revised index composition. As a result, both Microsoft and Nvidia will claim the top positions in both the fund and the index, with Apple dropping to second place.

Nvidia's market value reached an astounding $3.33 trillion on Tuesday, surpassing Microsoft as the world's most valuable company. Despite this, the XLK fund currently has only a 6% exposure to Nvidia, while holding 22.5% in Microsoft and 21% in Apple. This discrepancy led to the fund underperforming its benchmark due to Nvidia's staggering 173% stock price increase this year.

To rectify this imbalance and capitalize on Nvidia's success, the XLK fund will adjust its holdings by rebalancing on Friday, based on market cap values from the previous Friday. Microsoft will retain its dominant position within the fund's portfolio with a 21% weighting, while Nvidia will also command a 21% weighting. Nevertheless, Apple's exposure will significantly decrease to just 4.5%.

The recent market activity suggests that a rebalancing in the ETF may already be underway, as Nvidia's shares saw a 3.7% increase to $135.85, while Apple's shares dropped 1.5% to $213.33. Steve Sosnick, chief strategist at Interactive Brokers, noted that this movement potentially signifies the ongoing rebalancing process.

The rules governing index and portfolio construction dictate that only two of the three technology giants can be held with a full weight of 21% in the XLK fund. Other large positions cannot exceed 4.5%. These rules were established in 1998 when the index was launched and aim to cap total exposure to stocks with a weighting over 5% in the broader Standard & Poor's 500 index at 50% of the portfolio.

Bartolini highlighted the unprecedented situation where three technology giants are vying for the top two spots in the fund's portfolio. The XLK fund's decision to increase its stake in Nvidia reflects the company's remarkable growth and reaffirms its position as a dominant player in the technology sector.