Ok, so after reading an article from the Fool, it jived with so much I was wondering about I have started to call my congressional critters and even NASDAQ themselves.
Contact NASDAQ and ask for Market Watch group - +1 212 401 8700
I do NOT want this stock in my retirement funds and I DEFINITLY do not want it at IPO prices that will only fade and make us all upside down on the stock for probably years. The debt here and the backroom deals with his other companies all make me want to stay away. Do not allow him to force us to buy his stupid shares.
Good news - you don’t have to! Just don’t hold a NASDAQ index.
I’m kind of with Matt Levine on this one. What you don’t get to do is say that you want to own a passive index fund but then get to decide that you want to own all the stocks in that index but one. That’s not how passive index funds work. A passive index fund says, “We own all the stocks in X market.” If a stock is in X market, the index fund will own it. That’s the whole point! They own all the stocks - so if SpaceX is a stock within X market, the passive index funds that represent that market will buy it!
But there are rules about how companies are included and excluded and how entry and exit to the index happens.
These rules vary with index definition and can be nuanced and one would hope that the rules are designed with fair play in mind, especially for small investors (Mr. Burns says “excellent”).
Those rules should not be too pliable by demand or pressure from certain stakeholders at potential expense of other stakeholders.
Both rules are likely going into the dumpster on June 8. After a recent consultation, S&P Dow Jones Indices decided to waive the profitability requirement and cut the seasoning period to six months.
What’s surprising is that this isn’t a universal rule. The waiver only applies to mega caps, most of which are Big Tech. That means ETFs tracking S&P indexes could soon have no choice but to buy large, unprofitable tech companies.
…
What’s even more surprising is the timing. The rule is expected to take effect only days before SpaceX’s IPO. OpenAI and Anthropic could also get a shot at the waiver later this year.
This also comes after Nasdaq adopted its own “Fast Entry” rule in March, allowing large IPOs to enter the Nasdaq-100 after just 15 trading days. That rule became effective May 1.
Edit:
The news is confusing on this.
Now I came across a link from S&P today saying no change for mega caps (but I didn’t scour every word),
Based on S&P DJI’s Index Committee review of the markets and after consideration of responses received from a wide range of market participants, no changes will be made to the eligibility criteria including financial viability screens, seasoning period, or minimum IWF, for the S&P 500, S&P MidCap 400, or S&P SmallCap 600 as a result of the S&P Dow Jones Indices consultation on the treatment of MegaCap companies.
Accordingly, there will be no changes to existing methodology for this index family. S&P DJI determined that exceptions to the financial viability, seasoning, and IWF requirements should not be granted solely based on market capitalization. The decision not to adopt the proposed exceptions preserves core index principles by maintaining consistent application of these key requirements. Although there may be trade-offs between strict adherence to these eligibility requirements and broad representativeness, the current methodology provides substantial market coverage and sector balance. As a result, the indices can continue to meet their stated objectives while preserving their role as representative and investable benchmarks for the U.S. equity market.
Right, but still. SpaceX is going to be one of the biggest companies to ever go public. It’s going to be massive from day one. If the point of your index fund is to track the performance of a given market, and SpaceX is in the market, then your index fund has to own SpaceX if it’s going to track the performance of that market.
Things like a seasoning period or profitability requirement usually aren’t going to cause the index to deviate from the actual returns in the market, because nearly all stocks that are newly IPO’d are relatively small. You can exclude them and it won’t matter. But SpaceX won’t be. If you exclude it for a long time, then your index fund will no longer match the market that it exists to match. The idea is that the market, and not the fund manager, decides what the basket of stocks is. For smaller companies, having seasoning or profitability exclusions doesn’t interfere with that principle - but for a huge company like SpaceX, it does. Something has to give - you can’t have both.
Again, that’s what passive index funds are for. The fund manager’s aren’t deciding which stocks should be in the fund - the market decides what stocks are in the fund. And if the market says that SpaceX is a really huge stock, one of the biggest companies in the world, then the index fund is a taker of that determination. It doesn’t gainsay the market.
If you want to be in a passive index fund, then that’s the deal. You don’t have to be in a passive index fund! There are plenty of other funds that are out there that don’t just track the market. Or if enough people are upset by this, I’m sure someone will offer a fund that is “S&P500 but not SpaceX” or whatever. But the whole point of passive funds is that the market, and not the manager, is deciding what the basket of stocks is.
Depends on definition of index (or “market” in your words).
An index definition sometimes includes profitability for some indices (profitability is itself market driven, by the way).
Or maybe now an index definition doesn’t include profitability all of a sudden (with these changes) for some indices.
Would you claim that the S&P and Nasdaq index rule changes just made are 100% on the up and up and fairly treat all stakeholders, including investors and small investors?
I mean - sure? They’re just indexes. They don’t have investors or stakeholders. They’re just a determination by the operative index managers that a given collection of stocks represents the 500 or 100 largest stocks in the index, subject to a certain set of tweaks and rules.
That set of tweaks and rules used to not conflict with the stated goal of these indices, which was to track the performance of the larger equities in the U.S. market or NASDAQ, respectively. There’s been a fundamental shift in the development path of certain companies going public, so now they do.
The indices can’t continue to have both the existing rules and to track the performance of the large equities in their respective markets. SpaceX is too big. The other IPO’s coming down the road probably are, too. The indices have to give up one or the other. They’ve chosen to stick with having their indices actually track market performance rather than stick with excluding certain stocks. That seems like a pretty reasonable choice.
Again, it’s passive index investing. You buy the whole market. You don’t buy the market “except for the stocks everyone thinks are really overvalued.” That would be an active fund.
It’s an index that is defined (intended to represent some market, but, again, defined by the index).
Definitions matter - there is no “market to track” until one defines it with an index.
This is my main point: All of the definitions of the index matter, they define the “market.”
Part of an index definition (how they defined their “market” that they want to track) in the S&P case is profitability.
Their market definition, via their index definition, includes profitability.
And second main point: The index provider has chosen to change their definition of market to accommodate (presumably) these large, unprofitable companies.
As you say, they chose to give up profitability in favor of market cap size, in their index definition. I certainly agree, they made this choice, so market cap has primacy in their minds (over the profitability criterion) when forced to choose.
There are all kinds of indices with all kinds of definitions, including profitability and dividends and price momentum and market cap, etc.
Ok, so you claim nothing fishy is happening.
Third main point: Index providers are companies with owners, employees and customers. Funds with owners and customers (investors) choose to license indices from the providers. I would say these are all stakeholders, including a huge number of investors.
IPOs are a special case, because there is little public information (SEC filings) and little price history. The market price is not seasoned. IPOs require particular due diligence, and it takes a while for the market to settle on a price. The new S&P 500 6-month seasoning is probably long enough to evaluate an IPO, but any shorter would be a problem.
There are many indexes that track the largest 500 stocks (Bloomberg, CRSP, MSCI). The S&P 500 is just one of many. Most do not include a profitability requirement. The S&P 500 also rebalances based on sectors (to represent the entire stock market), and has a committee that could reject buying SpaceX after 6 months (unlikely but possible).
Excluding big IPOs from passive portfolios
“Dimensional excludes IPOs for like a year, and Avantis adds them but only once they have sufficient info to assess them under their methodology, and only at the weights that are justified under their methodology (and they have the flexibility to delay adding them until the price makes sense given expected returns).”
Fyi, the news is confusing on this (and/or I’m just confused).
Now I came across a link apparently from S&P today saying no change for mega caps (but I didn’t scour every word),
Based on S&P DJI’s Index Committee review of the markets and after consideration of responses received from a wide range of market participants, no changes will be made to the eligibility criteria including financial viability screens, seasoning period, or minimum IWF, for the S&P 500, S&P MidCap 400, or S&P SmallCap 600 as a result of the S&P Dow Jones Indices consultation on the treatment of MegaCap companies.
Accordingly, there will be no changes to existing methodology for this index family. S&P DJI determined that exceptions to the financial viability, seasoning, and IWF requirements should not be granted solely based on market capitalization. The decision not to adopt the proposed exceptions preserves core index principles by maintaining consistent application of these key requirements. Although there may be trade-offs between strict adherence to these eligibility requirements and broad representativeness, the current methodology provides substantial market coverage and sector balance. As a result, the indices can continue to meet their stated objectives while preserving their role as representative and investable benchmarks for the U.S. equity market.
Yep. To be clear, I’m not saying that I would make the same choice, or that they made the right choice. Just that the enormity of the SpaceX IPO forced them to make a choice that hasn’t really been presented before. SpaceX is expected to debut as one of the ten largest companies on the market, somewhere around #7-#9. That’s unprecedented.
And the choice whether to leave it out for a while or bring it in quicker is (or ought to be) affected by what your index is trying to do. If you have a total market index fund, your fund is intended to give purchasers exposure to every stock in the market. Makes it harder to leave any out. Indices like the S&P 500, though, aren’t entirely trying to do that - they’re only looking a subset of the market to begin with - so it’s not quite as strong a tension. It’s not your intention to exactly encompass the entire market, warts and all, so maybe you have some other rules that apply to which other stocks you exclude - for a while.
You might decide instead to have rules about which companies are appropriate to include in your index, rather than including all the companies that meet the size requirements in your index. But that does provide some tension with the whole point of index investing. I alluded to Matt Levine upthread, and here’s his take:
The basic idea of index investing is that you are not smarter than the market, so you should just buy whatever stocks the market tells you are good. It is a discipline of self-effacement, but it is hard. “The market is stupid,” you will occasionally think, and then what?
The most straightforward form of indexing is that you invest in all of the public companies in proportion to their size, but the best form of indexing would clearly be “you invest in all of the good public companies in proportion to how much they will go up.” Like if there were an Index of Good Companies, you’d rather buy that than the Index of All the Companies.1 This is hard to achieve for fairly obvious reasons: If the person picking the Index of Good Companies knew which companies would go up, she’d be managing a hedge fund, not an index.
Now, there can be tension between these principles. “My index matches the performance of the [Entire/Large Cap Equities/Large NASDAQ Equities] market” on the one hand, and “My index excludes companies whose performance is likely to be temporarily anomalous” on the other. When all the anomalous companies are small, you never have much of a conflict. When an anomalous company will be valued by the market at ~$1.75 trillion, the conflict arises. I don’t think it’s “unfair” whichever way the index chooses.
Turns out, as noted upthread, the S&P 500 appears to have decided not to change their approach in response to the conflict:
So for the first year of trading, there’s a very good chance that the performance of the S&P 500 index will materially deviate from the performance of the 500 largest publicly traded companies, in a way that hasn’t really been present before.
There used to be a profitability requirement and a time-delay requirement.
Suddenly, and not so coincidentally, both are being waived. I smell a pressure leak, not dissimilar to the way the ratings services caved in their bond ratings in 2007 because, your know, “if we don’t rate them they’ll just go down the street to another service.” (I am not saying this will end the same way.)
It’s clear that any exchange would love to land these companies at IPO time, for trading, from inclusion in indexes, etc, and so the Naz has decided to change the rules at a suspiciously opportune time. They could have, of course, stuck to their guns, er, rules, but that might have convinced the billionaires to shop around for another more compliant place to list.
While the weight in the associated indexes won’t be as dramatic as it might seem (it’s only on the public shares, and not on the entire tranche, and so does not include treasury stock, private placement, options, and the like - more than 80% by some reports) it’s still gaming the rules to suit the barons, and potentially at the expense of the little index investors. It might turn out great, of course, but there’s a lot more risk in this game than the “indexes” have heretofore countenanced.
No, I would think only for a market cap weighted index (if by small you mean market cap size).
And for:
Maybe for market cap weighted. But for another weighting, no, again (if by large you mean market cap size).
This is one reason why I keep writing:
“One defines an index and that index is the market definition for a fund’s benchmark.”
I guess maybe it’s a technical, nuanced point, but it’s really not, because while market cap indices may dominate assets, they are definitely not the only kind of index weighting.
Another reason why I keep writing that sentence is because there is no “market” as a specific, well-defined thing.
There is an index as a specific, well-defined thing that can actually be measured and tracked with an investment fund.
(And when we start wondering and discussing what is in the index and the rules, we might need to know or at least be aware of this specific, well-defined thing)
Funds define an index and benchmark against that specific thing, not some “market.”
And when funds define an index to benchmark against, the fund is deciding what its “market” is, there is no additional market. The index is the market for measurement purposes.
My thesis here is retirement accounts. Not many offer you a ton of options and I can tell you that my work retirement plan doesn’t tell you if the fund is nasdaq based. You have to do a lot of digging, and know what questions to ask to find out. Most people who have a retirement account rarely change it.
Yet, even then, I am very advanced compared to a lot of of investors and I still only have about ten funds in my retirement account. The other twenty or so are time based target funds. Limit options means limited ways to avoid this.
But longer term, there is a good chance this is one of the largest companies on the planet over the next couple decades.
If they crack the code first on asteroid mining, it is game over.
They appear poised to reign on satelllite/wireless connectivity, globally.
With both a proven launch system (#2 isnt even close) and the already existing Starlink network, their first-mover advantage is massive.
Space tourism, humans in space…distractions. Autonomous/robotics/AI, in space, will be where the money is at.
With proceeds, they should be buying niche companies for everything from 3d printing to water extraction.
Passive investors who think the market only goes up need history lessons. Feels frothy up here. History rhymes sometimes.
—
the S&P 500’s dot-com bubble peak, the index reached a closing high of about 1,527 on March 24, 2000.
What happened next:
The index fell roughly 49% during the 2000–2002 bear market.
It finally surpassed its March 2000 high in May 2007.
So on a price-only basis, it took about 7 years to regain the previous peak.
However, that’s not the whole story:
If you reinvested dividends, the recovery occurred sooner, around late 2006, because dividends continued to be paid during the downturn.
Unfortunately, investors who celebrated the new high in 2007 were soon hit by the 2007–2009 Global Financial Crisis, during which the S&P 500 fell another ~57% from its 2007 peak. Global Financial Crisis
