Good. Indexes are supposed to be slow-moving, precisely due to their entry requirement of sustained profitability that skews towards mature companies.
All that an inclusion of these new companies would accomplish is a bailout of their stockholders by pension funds and ETFs where millions of regular people shoulder all the downside risk.
SpaceX and OAI stock will be available through Robinhood, Questrade and all the other retail investor markets. Individuals can make an informed choice to trade it there, rather than have it automatically added to their index fund without having any say.
At this moment, there is so so much, publicly available information [1] on the fact the SpaceX IPO is the biggest scandal in the long history of Wallstreet insiders fleecing the "Johns".
A scandal orchestrated and cheered on by the NASDAQ, as well as Goldman Sachs and JP Morgan the underwriters, that if you spend any money on it, you deserve to be parted with your money.
And if you have a 401k...you are forced to buy no questions asked.
This will become such a disaster for retail, that hopefully Goldman Sachs and JP Morgan and the NASDAQ too, will spend their next 10 years in court defending action group lawsuits.
[1] - https://www.instagram.com/reel/DWzTFAEAhSe/
"SpaceX IPO retail offering is worrying" - https://youtu.be/T8e2FbwN7dw
"SpaceX IPO: Nice Try Though" - https://youtu.be/IHD8BDFYyGI
"SpaceX IPO Scandal" - https://youtu.be/8rS3fTbC7TE
"Anthropic, OpenAI Should Not Be Allowed to IPO, Says Ed Zitron" - https://youtu.be/zbKDmkJPVvI
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Two of those YouTube links are to Patrick Boyle who is a very respectable and knowledgeable ex hedge fund manager who dives DEEP into the topic while remaining entertaining. It’s a hilariously outdated take to say that YouTube content guarantees a lack of value or authority.
Patrick B is also a finance professor and most of his presentations (generally) maintain a level of academic rigour.
he got into the youtube during covid because he was posting YT vids for his students, and they just kept sharing them with everyone; he just ran with it
also: he talks deliberately slowly for subtitle and non-english speaker purposes; use the settings to speed him to x1.25 or x1.5 speed
And your argument is?
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> if you spend any money on it, you deserve to be parted with your money.
Yet it's already trading at >20% over IPO price on Bitmex
That is leveraged speculation on a future listing before real float, real index flows, or real public market ownership exist. With a 20% premium that is evidence that the hype machine is working, and the best evidence of engineered retail FOMO.
> evidence that the hype machine is working...
Which is exactly the kind of thing that can stave off disaster for years. Just look at TSLA market cap.
Companies are innovating things that significantly enhance human capabilities and people will still find a reason to drag them down. I am not a fan of either these companies. At the same time, I strongly disagree with these doomer scenarios as they are dangerous for progress of humanity.
> they are dangerous for progress of humanity
A tiny bit hyperbolic for someone who's not a fan maybe? :)
Concentrating the cognitive power of AI in the hands of just a few sociopathic Capitalists is NOT, I repeat NOT PROGRESS.
yea but you realize you're posting on HN, right?
Of course? I’m not expecting upvotes or whatever — IDGAF about that. I care about stating the truth in places where truth is in short supply.
For your own safety do not read or be advised by Ed Zitron. By all means skip the SpaceX ipo if you like: makes sense. But Ed is neither perceptive nor correct historically.
Case in point: a lockup period ending matching with mandated index fund buying is emphatically good for IPO buyers: it adds liquidity to a major cliff every IPO company faces: liquidity seeking by insiders on a schedule.
Now it may be bad for axed buyers like pension funds but buy side liquidity coming in to a company is always good for existing shareholders. Reading Ed would make you think the opposite.
>> a lockup period ending matching with mandated index fund buying is emphatically good for IPO buyers
I cant believe you wrote this. You are making Ed Zitron case for him. And the lockup period in this case has been reduced to 15 days or less:
https://youtu.be/T8e2FbwN7dw?t=96
https://youtu.be/T8e2FbwN7dw?t=123
> a major cliff every IPO company faces: liquidity seeking by insiders on a schedule.
LOL, so the insiders can dump their shares. This is exactly What Zitron says. Maybe we should have Mark Karpeles' or SBF's opinion on this matter, too.
Also worth noting that other index providers are less principled.
> Nasdaq changed its rules recently so SpaceX can join the Nasdaq 100 Index, a cohort of the largest non-financial companies listed on its exchange, in just 15 trading days, down from a three-month minimum. FTSE Russell adopted a similar approach, shortening the waiting time to five trading days
if i had to short 1 of the 3, it would be OpenAI
If I had to short 3 things, it would first be the NASDAQ 100, followed by anything Elon, then the greenback
The company with the best model by far?
Well, joint best.
At the target market caps people are talking about, I wouldn't blame anyone who shorts all three: even if you're optimistic about the value of the tech, monetising is hard, and competition reduces profits.
There are so many indexes these days and they all have different angles. I don’t see this as being less principled and more it’s the nasdaq 100.
More like its a competition to get the listing -- not dissimilar to Amazon shopping cities for its corporate base. Set up a competition and get the best deal would be my speculation on why it was done (as well as goose the demand).
Yes, it's the same principle that gets you financial advisors who push you into high-fee fund choices that earn them kickbacks. Completely understandable from the PoV of these parties' self-interest, yet entirely contrary to your own self-interest as a customer and investor.
You seem to be confusing "listing" - the stock exchange where a company chooses its stock to trade (i.e. NYSE, AmEx, Nasdaq) with "indexes" - a list of stocks that is often the basis for index funds.
The Nasdaq 100 is not the same as Nasdaq. A company can be in many indexes but only one listing. There may have been competition for the listing but there is not competition between indexes for inclusion.
The implication is that Nasdaq (company) changed the rules for the Nasdaq 100 (index) in order to get the listing on Nasdaq (stock exchange).
Many companies are listed in multiple exchanges. Unilever, Shell, AstraZeneca, BP, and many more.
There was never a competition. It was explicitly designed to get a better "deal" where they wanted to open it.
>All that an inclusion of these new companies would accomplish is a bailout of their stockholders by pension funds and ETFs where millions of regular people shoulder all the downside risk.
Carvana is the poster child for this. It's astonishing that a company with a history of shady practices, and that has yet to offer a convincing explanation for why it is not a scam, is part of the S&P 500.
Ah, so you'd like the passive broad market index which contains the 500 biggest good companies?
Do tell us if you find one I guess.
To me it's more about how real the financial strength of the company is versus being propped up on some shady accounting. Not sure if that was the case with Carvana or any of these new IPOs, but personally I have my nest egg in the S&P and don't want sharks abusing the index for their pump and dump exit strategy.
No, but how about the 500 that
have been profitable under GAAP accounting rules for at least 12 months
have a public float of at least 10% (so that new investors have some governance rights)
have traded for at least 12 months (and won't have sudden changes in public float or shares available due to lockups and recent listing)
Why is that set of rules particularly good?
Ultimately, it's consistency that's more important with stuff like this (IMO, obviously).
Move slow, fix things.
No offense but your responses sound like AI or engagement farming. I think the "why are these rules good" is self-evident to anyone who read the comment.
> Ah, so you'd like the passive broad market index which contains the 500 biggest good companies?
And a reminder: not just "good" now, but good over time.
Good companies turn bad (Apple almost went bankrupt), and bad companies can become good (see again Apple; in the UK, recently Rolls-Royce).
Rolls-Royce the luxury car or power plant manufacturer?
Power plant - the car company is owned by BMW
That's what "value funds" do.
But do they historically beat the S&P 500?
Yes, but not in the last decade or so.
In any case, it's been only in the last years that we have had an explosion of a huge variety of funds with low fees, so some of these product strategies need to be retro fitted for a time they did not exist.
Please cite funds that beat passive indexes over long periods of time.
Medallion, Renaissance, Dodge, Sequoia.
But I don't think that's what you were really asking.
Interesting those are value funds? Of course that was not what I was asking or what this thread was about.
Your question is still not what you're asking. Passive funds do nothing but follow indexes, so what you're really asking is "have value indexes ever beaten the general sp500 index?".
And the answer is yes, e.g. both the S&P 500 Value Index and S&P 500 Pure Value Index have beaten the S&P 500 historically.
Small Cap indexes, have also *significantly* outperformed the S&P 500 from 1927 till today (a compounded 13.1% annual growth).
Value stocks represent companies whose price-to-book is particularly attractive compared to the underlying business, and since investing is tied by the sell/buy ratio, buying at a discount improves it. Needless to say, value stocks require more risk, and risk is directly related to potential growth.
Small caps, are both riskier and have a much larger room to grow, they have significantly outperformed the SP500 since 1927.
Neither value nor small caps have done well, in the last decade, as the financial markets have multiple times provided better returns to a small but heavy portion of the market that was neither risky nor at any point had particularly attractive price-to-book ratios.
No you’re just assuming what I am asking. You have proven my point so thank you. No examples and lots of buts and exceptions. We are probably talking around each other to some degree but that’s ok!
Not sure what I have proven.
I gave you numbers and names of indexes that have historically beaten the S&P 500 index in the value category.
All of those have one or more ETFs that replicate that index.
There's an extensive amount of scientific literature talking about the outperformance of value and small caps to the broader market, starting from Nobel price winning Eugene Fama.
No you provided examples with but statements and a few of the examples are private close ended funds.
You can just pick stocks - if you pick a fairly low number of large stocks in broad categories with correct weight, you will track the index.
And the relative values of those stocks will shift requiring rebalancing. You might be able to do that with new dollars for a while but hopefully, eventually, the swings are much more than new dollars and then what? Pay capital gains tax on sales to rebalance? Convince yourself the new random allocation is fine?
I thought the point of index funds weighting by market cap is that they don't require rebalancing, because the weight of stocks in the index exactly tracks price movements. You just keep holding the exact same number of shares, and more valuable stocks automatically take up more of your portfolio.
Yes, this is one of the benefits of a cap-weighted index fund.
It doesn't eliminate the need for the fund to rebalance, because of companies moving in and out of the index criteria.
But it certainly vastly reduces the need of the fund manager to trade.
(Also, stock buybacks and new share issuance should in principle not change a company's index weight, but in practice they sometimes do.)
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If you pick stocks with the correct weight to track the index, you're effectively running an index fund. And so you don't have to rebalance to keep tracking the index.
1 If you never rebalance, you're never adding new stocks to the index, nor removing stocks that do not belong to it anymore.
2 You need to rebalance to take corporate events into account: new stocks, buybacks, dividends, etc...
You can add stocks whenever you put money in. Whether that's because you got your paycheck or a dividend or some other income is kind of irrelevant. And you can remove stocks when you take money out. But you probably shouldn't start selling one stock to buy another just because their prices moved, unless you have information that lets you time the market.
But then you wind up with a portfolio that isn't balanced and isn't tracking like an index fund. An index fund doesn't simply buy a flat amount of stock and hold it, they buy stock in proportion to the relative weight of the exchange. Which is always moving
Market cap weighting is special. If company A has 500 shares, company B 500 also, than a fund that has 5 shares of A and 5 of B is market cap weighted.
Indexes rebalance frequently. The "correct weight" today, won't be the correct weight in a year.
What are you talking about? Those index fund are constantly rebalancing. This is why you buy an index fund, so you don’t have to constantly rebalance your portfolio.
Philanthropically-minded people will move the winners to a donor advised fund which gives FMV write off without ever paying capital gains.
With index funds you never have the strong winners to do this with, and so giving is far less tax-efficient.
I don’t think this is correct. Gains historically accrue to a small number of companies in a given time window. If you buy all the grocery stores, you’re exposed only to sector risk, if you pick one or two, you’re also exposed to the risk those companies don’t contain the “winners”.
I suspect the number of picks you would need is surprisingly small to reach high parity with the S&P.
If you don’t pick the right grocery company, you have a shot at picking the right telecommunications company. You pick fewer winners, but you’re also picking fewer losers.
The real reason to do this is because you want to avoid specific companies that are inside the index. You would only do this if you felt confident in your ability to avoid investing a lot of capital in losers. Even if you’re great at avoiding the telecommunications loser, you might be worse than average at avoiding the loser in other sectors.
I don't know about the typical HN contributor but I personally lack the cash to but all the stocks in the S&P. There are 503 stocks tracked in the S&P 500 index. It would cost about 2.8 million USD to buy 100 shares (one board lot) of each if you were naive enough to weight your purchases that way. If you were to weight the stocks differently (eg. total market capitalization of each company) the amount would be higher.
Or, I can pick up 100 shares of an index ETF for a few thousand and have someone else do all the work for me including rebalancing and doing all the other required calculations (lot tracking and cost basis calculations etc.).
Trading in lots of 100 hasn't been required since I dunno, the 90s?
Assuming you're in the US there are several competent brokers that sell fractional shares. Any broker will do lot tracking and cost basis calculatioms for you, they're required to.
Rebalancing might be a pain, yes. I'd bet the drift isn't too bad most of the time, but it's probably effort every time you add or remove money. You'd want to build a tool to tell you how to add and remove to get closer to the index. If you can get the index weights and your holdings in a machine readable format, it would seem pretty tractable, but it would take time to setup; there's a reason funds have expenses, but index fund expenses are small.
I'm 100% invested in funds because it's a lot less work, but if you felt strongly about excluding certain stocks, I think it's pretty doable for say S&P 500. Tracking a total market index, or an international index would be more challenging. Bond indexes are also challenging to track, even for bond funds.
Interactive brokers offers fractional shares I'm sure other brokers do as well.
ESGV
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Im pretty sure Enron was in there in the past as well - 7th largest by revenue... that would make Carvana seem like nothing.
To answer your question honestly though -- the inclusion is mechanical based on criteria not policing based on opinion. Carvana being a history of shady practices is your opinion... (I would agree with you)
My opinion, yes. But if someone said they had invented anit-gravity, then showed you a bowling ball "floating" but with a sheet covering any potential support, you'd be pretty suspicious. And if they refused to remove the sheet, and had previously been convicted of fraud, you'd probably be extremely suspicious. But it would still only be your opinion until the sheet was removed.
But what if your dad had a closely-related sheet company that you regularly transacted with but isn’t public because he was barred for life from giving public demonstrations but owned tons of shares in your demonstration and sold millions of dollars worth on a daily basis?
Surely then it would ease your suspicions…
Please elaborate why caravan is a scam?
See my reply to @rtpg. The short answer is that it is believed they are selling high-risk loans to a company they control, making it look like the publicly traded Carvana is some kind of miracle in the car industry while offloading the risk to anonymous shell companies.
Time will tell if it’s a ponzi or not. I am not fully convinced but it will be interesting to see, the family dynamic is always a bit suspicious and especially how they were at the end of a rope post Covid.
https://en.wikipedia.org/wiki/Carvana#Controversy
"In January 2025, short-selling investment firm Hindenburg Research published a report titled "Carvana: A Father-Son Accounting Grift For The Ages," in which it disclosed a short position against the company. The report alleged that Carvana's financial turnaround was a "mirage" propped up by accounting manipulation and lax loan underwriting."
"A class-action securities fraud lawsuit is proceeding against Carvana, its founders, executives, and underwriters in the United States District Court for the District of Arizona."
(i have no opinion on the matter, just functioning as your google)
> i have no opinion on the matter, just functioning as your google
If you don’t have anything constructive to add there is zero reason to be a dick.
These are only claims and we will still have to see if the claims become true. Going back to my point it’s hard to say to a fact that it’s a fraudulent company. The financing arm is hardly unique and if they indeed are running a ponzi it would be surprising it could last so long.
>...if they indeed are running a ponzi it would be surprising it could last so long.
There's a practice in the loan industry called "pretend and extend," which basically means endlessly extending credit to lendees who are behind to avoid acknowledging the loss. Remember, in Carvana's case the loan buyer only exists to take on debt, not be a going concern. I think much of the market actually realizes Carvana is a scam, they just see that it is a relatively sustainable one as long as the government doesn't step in. And they don't see that happening, particularly with the current administration.
Madoff’s scheme ran for nearly 15 years, starting in earnest possibly 20 years before that.
I think “long” is very relative to the scam.
Carvana has been written about in the WSJ in glowing articles, that now have shifted to a questioning tone. This may be that inflection point.
https://hindenburgresearch.com/carvana/
why go that far? herbalife moto is probably "we're a pyramid scheme scam" and they are 45% vs sp500 25% for last 12mo.
you'd better of investing scam500 than sp500 nowadays.
Herbalife has decades of profits from selling wannabe Herbalife distributors a dream of financial independence they'll never achieve though, which might be unethical but is a bit less likely to lose your pension fund money than a company accused of getting 73% of its earnings from a deal with a convicted fraudster...
Whenever someone says nowadays, they're highlighting recency bias. The goals of holding a broad market ETF are diversification leading to sleeping well over the long term (at least to me).
Crime pays. But when you go that far, why stop at investing in scams? Surely you can make money faster by robbing old ladies at knifepoint?
It's a matter of latency vs. throughput.
the discussion is Old Ladies At Knife Point LLC being in the stock exchange and in indexes.
How well do SCAM500 stocks do over a time period that includes two recessions, compared to SP500 ones?
I've no doubt that the short-term gains during a bull market on all sorts of garbage are significant.
what's the argument for it being a scam?
They're an outlier in the industry in terms of profit per car. But they don't actually get revenue from selling cars, their revenue comes from selling car loans. So they're making the additional margin on the financing. They are also famous for not turning down loan applications. So putting the pieces together, it seems like they are selling high risk loans at a healthy profit. Which brings up the question of who is buying those loans. They don't disclose the buyers, but claim that those buyers are not controlled by Carvana or its parent. Given the history of fraud, it's hard to take those claims at face value. The suspicion is that they are selling the loans to family-controlled shell companies and leveraging the stock to finance the scheme.
This is how many businesses operate. You have still not provided example of fraud or scam behavior.
If "many businesses" operate this way, then "many businesses" are committing fraud. You can't publicly claim to be selling loans to an unrelated company when in fact you control that company.
The latter has not been proven and the former is pretty normal for business. We will see how it plays out in the court and markets.
The second law of thermodynamics hasn't been proven either, but I'm fairly confident in it. ;-)
Fair enough, but courts tend to apply a slightly higher evidentiary standard than thermodynamics. ;)
shady debt offloading onto its sibling financing entity, which is run by Carvana CEO's father, a man convicted of fraud
> a man convicted of fraud
Most practitioners in the field see that as a very strong signal of future fraud.
At that level they call it financial engineering.
> financing entity, which is run by … a man convicted of fraud
I didn’t think that was allowed.
Commander in chief got convicted in NY before being re-elected, I think everything's allowed these days.
> Individuals can make an informed choice to trade it there, rather than have it automatically added to their index fund without having any say.
Are you suggesting index funds need unanimous consent from all owners before a company can be added or removed?
Indexes have rules for entry, so people using them supposedly agree with them. On the other hand, they were talking about opening exceptions for these companies, which was not part of the initial rules.
That's not even slightly what they said. They said that people can trade the stock directly if they want to, rather than have it essentially forced upon them by inclusion in an index
No, indexes are meant to track something. The Russel 2000 index has very different criteria for the S&P 500 index. The Dow Jones is yet another one.
The criteria for none of the above is “slow moving”, far from it. Those are all expected to be high growth vehicles for retirement. Safe stuff is bond blended.
Plenty of people at shit in the GFC being invested in “slow moving” S&P 500 companies like Lehman Brothers, WaMu, AIG, GM, etc.
“Was profitable for a while” != “safe” nor is it necessarily good to park money there. You need explosive growth companies that invest rather than profit (like Amazon) being in the S&P 500 are a critical part of its performance.
If retirements only tracked stable mature companies that would be utilities and other stuff that doesn’t actually get you to retirement.
It’s important to note that index funds will eventually get in, so it’s not like 401k will never be holding these stocks. It would be silly to assume that the stock is going to tank that much on day 1, on the asumption that there are not enough investors to buy the big three IPOs that are coming out this year. There is plenty of money in the market, and everyone knows index funds will buy these stocks when the companies get in, so everyone will be able to dump them if needed in a year or so.
Btw I don’t really know how index funds work, but if they need to track the index as closely as possible, they will all have to buy those stocks on a certain day, no? There will be a crazy price hike when they do so. Or maybe they have terms that let them smoothen their trading around entry and exit?
To a first approximation, yes, the index funds all need to buy the stock on the same day.
An unexpected surge of buying like this should lead to a big price hike. But everyone knows it's happening, so you'd expect every hedge fund and proprietary firm in the world to buy the day before the index funds buy, and sell into the price hike. So in fact the price hike will be a day earlier than expected. But wait, anyone smart enough to see that should buy the previous day...
In this way the "smoothing" of the trading at entry and exit gets passed on to intermediaries: other market participants who are expert at this.
This all costs the index funds, because every dollar of profit for the other firms is a dollar out of the pocket of the end investor. And huge index events like this are a particular bonanza for these traders. But it probably costs less than you think. Ultimately it's a highly competitive market: the slippage from this approaches the extent to which the prop traders have a higher cost of capital, plus a small risk premium. And remember that they don't have to find "extra" money to fund this trade. When they buy SpaceX they will sell 499 other stocks, doing the same trade there in reverse. Here's a study that approximates the effect at 0.86%[0]. By comparison, the banks underwriting the IPO typically take around 6% [1]. Though this will be smaller for a huge IPO like SpaceX, while the index arb trade will be bigger.
[0] https://www.eastspring.com/hk/insights/deep-dives/navigating...
[1] https://www.pwc.com/us/en/services/consulting/deals/library/...
0.8% of drag is a lot when you can do basically the same thing by not strictly following the index.
There are funds from Dimensional and Avantis that are basically just index funds but with a bit more leeway to avoid these obvious pitfalls, and from what I saw they do perform approximately 0.5% better per year.
0.8% is substantial indeed, but if i understand correctly, it’s 0.8% on that one stock, so much less on the index itself.
Those funds that perform better probably take a higher management fee that might cancel out the gain. May be worth it to have a smoother return though.
As in, current indexes perform that much worse. Frontrunners around index rebalancing etc. SpaceX is the same idea, just way more obvious. People knows what the index funds are going to do, and so they exploit that.
The alternative funds are a little pricier, but not so much so as to negate the inherent performance advantage. Typical cost ratio is 0.1-0.5% depending on the niche (wide indexes are cheaper, more niche things like small cap value cost more)
>This all costs the index funds, because every dollar of profit for the other firms is a dollar out of the pocket of the end investor.
This is so wrong I'm not sure you understand common sense economics and by economics I don't mean anything you can find in a text book. If I invest nothing, the other investors or traders can still make a profit without costing me anything.
Opportunity costs are never real costs. If I have $10, and the traders do weird things with the prices and I don't spend the $10 on anything, I still have $10. The traders failed to cost me.
You're also ignoring the underlying issue which is that the valuation of SpaceX on the open market is different than the valuation it could get from forcing index funds to buy in early. If the stock is worthless then short sellers will make money, but short selling only works if the short sellers don't get squeezed. If the passive funds buy two weeks in, then early traders know that they can sell to a greater fool at inflated prices. Any short seller who is trying to discover the true price will stay back and short directly after the indexes have bought. That's the perfect moment for them. They want the post IPO hype and bull market, only for the stock to collapse within a year.
There's a real desire out there to tell a narrative where SpaceX is a massively fraudulent piece of financial engineering, a pump and dump scam where the stock will "collapse within a year" and retail investors will be left holding the bag.
There's definitely some financial engineering at the margins, but as I see it the facts are:
- Musk is still going to own 40% of the company. If he's selling 4% of it, his incentives are aligned with keeping the rest of it high
- the index funds ultimately are fast tracking the big IPOs because their customers, in aggregate, want that. And the market structure really has changed since the days when the index inclusion rules were first written and companies went public smaller.
- People have been banging the same drum about short sellers with Tesla since at least 2017 - AFAIK it's still one of the most shorted stocks - and it's up 20x since then.
- Institutional investors with more sophisticated strategies than "buy the index" or "pump and dump lol sell to the index funds" will be participating in the IPO and in fact will be the main drivers of price. Everything I've seen suggests that if this is a "retail heavy" IPO, that means 20 or 30% of the shares ending up with retail instead of a more typical 10. These other institutions could be wrong, but they're not mechanical price takers.
I've shown above how one of the effects people make the most noise about - the index balancing arbitrage - is likely an effect of order of magnitude 1%. It's on the noisemakers to show how any of the other effects you mention can be massively more impactful.
'their customers, in aggregate, want that' citation needed
> It’s important to note that index funds will eventually get in
S&P500 at least requires profitability, so these stocks may not make it in anytime soon.
> There is plenty of money in the market
Their float will be very small so yes, the value of their shares that anyone could buy at even the most optimistic valuations would be tiny compared to most public megacaps.
> Btw I don’t really know how index funds work, but if they need to track the index as closely as possible, they will all have to buy those stocks on a certain day, no?
S&P wouldn't include them until they became profitable and even if they did they wouldn't even be in the top 20.
>All that an inclusion of these new companies would accomplish is a bailout of their stockholders by pension funds and ETFs where millions of regular people shoulder all the downside risk.
The purpose of an index is to provide a benchmark of the market, not to build funds that follow the index.
> The purpose of an index is to provide a benchmark of the market
Usually a subset of the market based on specific criteria. Total market indexes and funds exist, maybe there is a reason S&P 500 despite its "strict" inclusion criteria is more popular than them?
On a fundamental level, the S&P 500 index is meant to be a benchmark of the market. Journalists, policymakers, investment managers, politicians, regular investors, everyone I know all use the S&P 500 as the benchmark of the US stock market.
If a significant percentage of the market is excluded from the index because they don't meet index inclusion criteria, then then index stops being a useful benchmark.
S&P500 is not a total market index. It tracks a specific kind of large firm, with certain filters.
Fast tracking means that the market likely wont have enough time to find the settled price (especially with the knowledge that passive funds are about to buy), and including a mispriced thing does not necessarily make the benchmark more accurate.
Those filters for S&P 500 inclusion criteria have changed many times. They are not sacred nor set in stone. The question is, do those filters, which were designed for GAAP profitable traditional companies & discriminate against fast growing cash-flow-reinvesting startups that prioritize growth over profit, unnecessarily exclude major players in the U.S. stock market? The S&P inclusion criteria reward companies that prioritize profit over growth.
SpaceX, Anthropic, and OpenAI are all giga-caps preparing to IPO, and none of them will be eligible for S&P inclusion because of the 12-month profitability requirement. At current valuations, all are part of the top 20 largest companies in the US. These companies may be excluded from the S&P500 for potentially years, until they reach 12 months of profitability.
And you are vastly overstating the effect of S&P500 fast track inclusion, the plan was to reduce it from 12 months to 6 months; which is more than enough time for the market to find a price.
> Under current rules, these fast-growing companies would be excluded from the S&P500 for potentially years, until they reach 12 months of profitability.
> And you are vastly overstating the effect of S&P500 fast tracking, the plan was to reduce it from 12 months to 6 months; which is more than enough time for the market to find a price.
They might never reach 6 months of profitability, let alone 12 months.
> which is more than enough time for the market to find a price
The price markets find would still inevitably be influence by the knowledge that the demand would increase massively in a few months.
> inclusion criteria reward companies that prioritize profit over growth
Or stable and sustainable growth. Whatever else SpaceX, OpenAI, Anthropic valuations are price in extremely optimistic growth. But yeah, I do see a point that including adequately priced growth stocks could be a net benefit but of course accouting for the actual valuation would turn index funds into managed ones.
Thankfully its not an issue at all since there is Nasdaq 100.
My mistake: it was Nasdaq that is being reduced to days, not S&P. Thanks.
Thank absolute Christ none of the companies you just listed will enter SP500 by default. The Risk/Reward is not functionally there to fast track companies and all of the examples you listed are too big to keep coasting on venture capital. Let them be public for 6+ months and let's see where they are at in the eyes of the public markers and then their inclusion can be re-evaluated.
What's the downside for the average pension holder with a 30 year horizon if they miss 6 months of Elon's newest scheme?
> If a significant percentage of the market is excluded from the index because they don't meet index inclusion criteria, then then index stops being a useful benchmark.
So what's the reason for fast entry specifically? If it's a significant portion of the market and will remain so, it doesn't need an accelerated entry. A benchmark should be conservative about new entrants so that it doesn't turn from a market benchmark to a trend/fad benchmark.
If time validates the valuations the entry will come in time, just like for previous entries.
> So what's the reason for fast entry specifically?
Inclusion in as many indexes as possible is basically the definition of "too big to fail." It's the ultimate de-risk to know that if you fuck up badly enough the government will just give you everyone's money.
Has anyone made sure Elon wasn’t born on Jekyll Island
Because the index needs accuracy. If a company is 1-2% of the total US market cap and not included in the index, then the index is wrong right now. The longer this company is not in the index, the longer this error compounds.
In the coming few months, multiple giga-cap companies (SpaceX, OpenAI, Anthropic) are all planning to IPO. These companies will likely never meet S&P profitability inclusion criteria for the next 5 years. These are not bad companies, but because the S&P inclusion criteria were written for old GAAP profitable companies, and not high-growth companies that invest their cashflow into company growth over profits. Excluding some of the most civilization changing companies from the benchmark means the benchmark is doing a terrible job.
"Because the index needs accuracy.", and I would argue that include price accuracy not just inclusion accuracy. The S&P is a benchmark that is designed to reflect a subset of the market, and giving only some companies early access to the benchmark changes the benchmark. So if you want a benchmark that's designed to include all the big stocks regardless of age, profitability, etc then go make a new benchmark. The only thing you need to do is convince others to use your benchmark.
"go make a new benchmark" completely ignores how this works in practice. Benchmarks are only useful because everyone uses the same one, you can't swap it out. The S&P 500 benchmark is used as a comparison for trillions of dollars of mutual funds, index funds, and institutional mandates. The further the S&P 500 strays from reflecting the actual market, the more useless it becomes.
Also the S&P criteria have been revised multiple times, it's not some sacred unchangeable document.
> The further the S&P 500 strays from reflecting the actual market, the more useless it becomes.
Here I once again agree with you in part, and disagree in part.
The S&P 500 should reflect the actual market. That is, the actual market of publicly-traded companies with legal requirements for transparent accounting and reasonable expectations of future positive cash flows.
As you wrote yourself (https://news.ycombinator.com/item?id=48408363), "These [mega-cap IPO] companies will likely never meet S&P profitability inclusion criteria for the next 5 years."
At this point in time, I don't think it's reasonable to expect future positive cash flows from SpaceX or Anthropic. There are indeed some reasons to suspect that there won't be future positive cash flows from them.
You want to turn S&P 500 to a total market index. Why? That was never its purpose.
No? Where did I say that?
The purpose of the S&P 500 is to be the "best single gauge of U.S. large-cap equities". That's direct from their website. I never dispute this.
I dispute the fact they claim to be the best benchmark of large-cap U.S. equities, yet have rules that (currently) exclude large-cap equities like SpaceX, OpenAI, or Anthropic.
Sure, but then it comes down to your opinion vs the S&P board's opinion. I suspect (given that there's only been a few days of this getting into the public eye) that more people support the S&P's position vs their critics. But the trade flows will show if people get out of SPX (or SPY/VOO) in the coming days.
My issue is that so many people have forgotten the purpose of the S&P 500 index (i.e. it's a benchmark to reflect the large-cap U.S. equity market), and instead treat it as a list of approved companies they should blindly invest their 401ks into. These people do not want to invest their retirement funds into the upcoming IPOs of the overpriced & unprofitable (SpaceX, Anthropic, OpenAI), and then are arguing the benchmark index should not include these companies.
But at a fundamental level, the S&P500 index exists to track the market. It was created decades before passive investing even existed. These companies are all large enough to qualify as major members of the index. If S&P started arbitrarily excluding parts of the market they find uninvestable, then that's compromising the integrity of the index, and defeats the purpose of the index entirely.
Reading this thread, there is so much confusion happening.
> If S&P started arbitrarily excluding parts of the market they find uninvestable, then that's compromising the integrity of the index, and defeats the purpose of the index entirely.
But they haven't started arbitrarily excluding parts of the market they find investable: on the contrary you are demanding they start arbitrarily change a long established and pretty basic rule to arbitrarily include pre-profit companies. Criteria on non market cap factors including positive earnings and liquidity are defined explicitly on their website along with the subjective "best gauge", which is entirely compatible with the idea it's a better gauge of large market cap company performance if it only includes companies whose market cap is supported by having given the bare minimum indication their business model can be financially sustained, not the ventures whose potential is most hyped[1]
[1]which obviously applies to OpenAI and Anthropic to a greater extent than SpaceX which actually achieved positive earnings as a private company before it pivoted to a model which bankrolls other Elon ventures and ambitions and needed to IPO as a result.
That's a fair point that the inclusion criteria are applied consistently, not arbitrarily. But I fundamentally disagree with their inclusion criteria. It was designed for traditional companies with low growth and high GAAP profitability, not high-growth companies rapidly reinvesting into the core business.
Amazon is infamous for having positive cash-flow yet running near-zero GAAP earnings for nearly two decades, because they reinvested absolutely all profits into the business. They were famously unprofitable, by choice of Jeff Bezos, and he created one of the most successful businesses ever. Under your logic, Amazon didn't belong in the index for most of its most important growth years. Only when it became GAAP profitable, it was allowed to enter.
SpaceX is cash-flow positive in its core launch business. OpenAI and Anthropic have tens of billions in revenue. These companies have found product-market-fit, and clearly demonstrate working business models. But neither of these companies satisfy one specific accounting metric that the S&P 500 requires for inclusion, so they get shafted.
The market has already priced these companies at giga-cap levels, these are some of the largest companies ever created, and that is a clear signal of something. The benchmark index should include these companies in some form, rather than gate them behind an antiquated metric.
I don't think earnings is an antiquated metric for valuing companies though. Other metrics exist to estimate future earnings and attract a different class of investor looking for different risk/return profiles than people wanting to index companies big enough to generate steady returns with fairly high confidence they'll be doing a similar thing tomorrow. If people want to invest in a different type of company from the companies the index was designed to capture they're entitled to do so: if their expected returns are that good you don't need to browbeat indices into changing their entire ethos to get funds involved in their IPO.
Sure, some companies which vastly outspent competitors on growth became very successful profitable midcaps and joined the relevant indices when they did, but everyone else waited their turn (including the ones that never became profitable midcaps because the money tap was their moat)
You can just buy the stock, you know. Nobody is keeping it off the exchanges. Or you can buy another fund that includes it.
> But at a fundamental level, the S&P500 index exists to track the market
No, it exists to track a subset of the market based on specific criteria and weights. It's not even based on the market cap of included companies directly.
'S&P Total Market Index' exists to track the market.
> qualify as major members of the index
Not based on the inclusion criteria.
AND even if that were changed they wouldn't be near the top anyway, despite the trillion dollar valuations initially they wouldn't even be in the top 20 by weight.
> and defeats the purpose of the index entirely.
The index has operated based on specific rules defining inclusion criteria for a while. Can we just conclude that it did not become the most popular index despite never being designed to track the full market or be based directly on total market caps.
After all it's the people advocating the inclusion of these companies are advocating an arbitrary modification to the rules just to get them in.
The "total market index" point has been addressed twice now. Nobody ever claimed the S&P 500 tracks all equities. Only you keep bringing it up.
On your claim that these companies "wouldn't be in the top 20 by weight": as I addressed to you other times in this thread, SpaceX float 1 year after IPO would be 50%, giving it an index weight of $800 billion. That places it easily in the top 20 large-cap U.S. companies. The article linked has a chart of forecast free float. Your claim is false.
https://www.economist.com/finance-and-economics/2026/06/01/c...
On "arbitrary modification" of rules: every criterion in the index was itself added or revised at some point. The profitability requirement, the float threshold, the dual-class share exclusion then reinclusion. All these rules were modified. If all rule changes are "arbitrary," so are the existing rules. The only meaningful standard for evaluating a rule change is whether it better serves the index's stated purpose.
The stated purpose of the S&P500 is to be the "best single gauge of U.S. large-cap equities." A company with a $1.75T market cap that ranks in the top 5 by size in the US is, by definition, large-cap. Excluding such a large company is contrary to the stated purpose of the index.
> Where did I say [I want to turn S&P 500 to a total market index]?
Right here:
> Because the index needs accuracy. If a company is 1-2% of the total US market cap and not included in the index, then the index is wrong right now.
If it's not a total US market index, then why is the index wrong to not include it?
Edit: and then again here:
> But at a fundamental level, the S&P500 index exists to track the market.
There are indexes which explicitly try to capture the entire market- the Russell 3000 is most prominent, but the Wiltshire 5000 is another one, and Vanguard's Total Market Funds and ETF follow the CRSP US Total Market Index. I believe all of them plan to include SpaceX/OpenAI etc. within a few weeks of its listing, which is what I'd expect from their goal of tracking the total market. Other indexes follow just a few stocks- most famously, the Dow Jones Industrial Average (built during an era of when it had to be calculated by hand every night) looks at just 30 stocks in a weird way(1).
The S&P 500 isn't either of those. It has a list of criteria for inclusion, one of which is profitability. They are sticking with that criteria. If you don't like it, sell your VOO and buy VTI instead.
1: It is essentially impossible to build an index that tracks the DJIA because, since it was done on pencil and paper, it isn't actually market-cap weighted, but is share price weighted, with a correction factor for each stock to account for splits, one stock replacing another, etc. Because of that nature, the weights of the DJIA change minute by minute, so someone attempting to track it would be subject to enormous error.
> Because the index needs accuracy
So you are saying that S&P 500 should be merged with Russell 2000 or rather just become a fully market index to be more "accurate". You do know that's something that exists already, having different indexes makes perfect sense and consumers can pick the ones they want based on their risk profile and preferences.
> most civilization changing companies from the benchmark
It took Google 2 years to get into S&P 500. For Microslop it was 8 years (!). So what's new?
I am saying none of those things. S&P claims their S&P500 index is the "best single gauge of U.S. large-cap equities". That's taken directly from their website.
I dispute this claim, because the (current) rules for S&P500 inclusion exclude companies like SpaceX, Anthropic, and OpenAI. All of these companies are planning to IPO this year, and even if these companies maintain their present valuation for a year, none are eligible for S&P 500. Due to profitability requirements.
Yet these are all U.S. large-cap companies, among the top 20 largest in the U.S., and by S&P's description of the index, should be included. Not including these companies makes the index inaccurate.
> [Google and Microsoft took years go get into the index], so what's new?
Because SpaceX, Anthropic, and OpenAI are $1T+ companies. Google and Microsoft were much smaller relative to the size of the index when they joined.
Best single gauge, not summary. Systematically excluding companies that are large and buzzy yet not profitable is a matter of intentional design to improve the accuracy of the gauge, even if previous companies were not quite this large. Anthropic and OpenAI are great illustrations of why you might want such a design: the bull case for each is that they're going to dunk the other and become the US's primary provider of AI inference, and neither is yet profitable, so by including both of them in the index you're "double counting" investor expectations of how valuable a company producing profitable AI inference will be.
Maybe you know this already, but this reads like exactly the kind of reasoning that people looking back at irrational market euphorias point to as a sign things were about to go awry.
The purpose of a benchmark is to reflect the market. If the US economy is pumping out high-growth but overpriced & unprofitable companies via IPOs, at unreasonable valuations, the benchmark should reflect that.
It's not S&P's fault this is happening.
On the contrary. There are many benchmarks, some small subset of which are intended to reflect the whole market.
There are indices for every little thematic and niche corner or strategy or idea, there are broad-as-possible indices, and there are indices with requirements like listed age and profitability.
I'm not debating any of that. This discussion is about the S&P500 as a benchmark, which has an expressly stated purpose of tracking large-cap US equities.
This discussion is about if S&P500 actually achieves this benchmark, when it has (antiquated) rules that exclude large-cap US companies of the likes of SpaceX, Anthropic, and OpenAI.
Benchmarks are governed (to some extent) by natural selection. If the S&P criteria prove obsolete, then it will be replaced by other indices that use your proposed criteria. Everything's going to be just fine.
> If a company is 1-2% of the total US market cap and not included in the index, then the index is wrong right now.
To be clear, S&P 500 relies on float, not total US Market Cap, and Space X will have a tiny float.
Even if it was included, SpaceX would not account for 1-2% of the S&P 500 (more like 0.1%), so even if we reason on the basis of a benchmark, it's not a meaningful difference.
https://news.ycombinator.com/item?id=48407542
Thanks, but should I conclude you agree with my point?
Even if he did, it seems he would keep arguing regardless.
No, because after lockups expire in 6 months, SpaceX float would increase to 40-50% and it's float-adjusted weight would be >1% of S&P. This is assuming share prices remain unchanged, when they could go either way.
SpaceX at its current valuation places it as one of the 5 largest companies by market cap in the US.
> Because the index needs accuracy.
No, it doesn't. At least, not the way you are probably defining it.
This sounds to me like you may be trying to use the index for something it's not really meant to be used for.
What is the S&P 500 meant for then? It was created in 1957 as a benchmark of US equity performance. That's S&P Global's own stated purpose. If it's systematically excluding companies that represent significant chunks of total US market cap, the index isn't doing its job.
Investment funds are for making money. Nobody cares about 'accurately reflecting the state of the market' if that's objectionably high-risk. You invest in an investment fund to make money.
There is no way you can commit to holding big quantities of these methane bubble swamp gas companies and claim it isn't high risk. You'd have to be certain you could bail at the right moment, and that doing so would not obliterate the market through your giant market move… or commit to being a giant bubble of fraud that can never possibly blow up, forever.
These are not responsible ways to make vast sums of money, not because they're unethical but because they're gambles at very high stakes.
You are confused what the S&P 500 actually is. It is a benchmark, not a managed fund. Investment funds that track the S&P 500 do not have a say on which stocks to buy. They copy what the index allocates. Whether these companies allocated are risky or not, has no relevance to if the benchmark accurately represents the US equity market. If three of the top 10 largest companies in the U.S. are excluded from the index, which may be the situation this year, then the benchmark is wrong. The benchmark is failing to achieve its stated function.
Your risk argument applies to actively managed funds, not to an index whose entire purpose is to represent the U.S. large-cap market.
Nobody cares whether the benchmark is no longer accurate (or whether it was accurate in the first place). People are furious because their investment allocation is tied to this rule change. If you or anyone wants an orignalist SnP number that accurately (by whatever standard you want it to be) benchmarks the market, you are free to do so very easily.
If they are methane swamp bubble giant frauds (there can be others: for instance, Enron, historically) then they don't count as companies for the purposes of the S&P 500. Methods for determining this might include the metrics the S&P 500 elected not to waive…
But it is not 1-2% of the total US market cap, is it?
It aspires to be that way. The market decides, and it hasn’t decided yet.
Am I missing something?
> If a company is 1-2% of the total US market cap
Over what time horizon should that number be computed? Every day? Every second? Every month/quarter?
It is not as simple as it seems.
I'm with you on this part:
> Because the index needs accuracy. If a company is 1-2% of the total US market cap and not included in the index, then the index is wrong right now. The longer this company is not in the index, the longer this error compounds. In the coming few months, multiple giga-cap companies (SpaceX, OpenAI, Anthropic) are all planning to IPO.
I'm nodding vigorously on this part:
> These companies will likely never meet S&P profitability inclusion criteria for the next 5 years.
But here, you lose me…
> These are not bad companies, but because the S&P inclusion criteria were written for old GAAP profitable companies, and not high-growth companies that invest their cashflow into company growth over profits. Excluding some of the most civilization changing companies from the benchmark means the benchmark is doing a terrible job.
The point of investing in a total(ish) index of the public stock market is to invest in companies that have a reasonable expectation of net-positive future cash flows, justified in part by legally-mandated transparent reporting of their finances.
You can't just buy every publicly-traded stock though: for one thing, that would massively incentivize obvious scammers to do the bare minimum to get their stocks included, and drag the index down. Avoiding companies that are illiquid, non-transparent, or lacking in a clear track record is important. The SpaceX IPO bears more than a passing resemblance to a pump-and-dump scheme:
1. SpaceX's line of business* is tremendously unclear.
2. SpaceX doesn't actually need external capital to fund its operations.
3. SpaceX is floating only a tiny fraction of its putative market capitalization.
4. The main purpose of the IPO appears to be to allow insiders to cash out.
5. The way the lion's share of the IPO gets sold is if large index funds and pension-holding companies demand shares, and that only happens with the index-inclusion exceptions we're discussing here.
So, we agree that these "mega cap IPO" companies won't be profitable in the next 5 years. That's a huge period of time. How can public markets accurately value a company that isn't expected to be profitable for such a long period of time; there are so many things that could change their trajectory towards profitability, all the more so if we accept your premise that these companies are "civilization changing."
My conclusion is that it's perfectly fine, even beneficial, for indices like S&P 500 to avoid any special treatment for these companies. If SpaceX is clearly profitable 5 years from now, and has reached 50% free-float, that seems like a good time to start including it in the index.
---
* Nearly all of its revenue comes from launching satellites and running a satellite-based communications network, but much of its putative valuation comes from a hastily glommed-in also-ran AI company, and its association with a person who is famous for running other businesses and for political connections.
> These companies will likely never meet S&P profitability inclusion criteria for the next 5 years.
They won't stay gigacaps for 5 years if they don't become profitable. At their size, they can't just keep burning money at that scale under the public's eyes. The funding will divert from VC to shareholder equity and that will quickly see they don't stay gigacaps.
So this is a self correcting problem. Either they'll start making money and hit profitability targets or their market cap will diminish.
If they're doomed, they're bad companies. This isn't complicated. You can run a fraud and double down real aggressively and as long as you're not called on your bullshit you look incredibly good, until you don't.
If they're doomed, they're bad companies. You can make the argument they're not doomed, but that's a separate argument.
If a significant percentage of the market is excluded from the index because they don't meet index inclusion criteria, then then index stops being a useful benchmark.
If you change a benchmark whenever you think it'll be 'wrong', then it becomes a measure of the heuristics you use to predict what'll impact the benchmark rather than a benchmark in its own right.
S&P claims their S&P 500 product is the "best single gauge of U.S. large-cap equities". For this benchmark to be accurate, at a fundamental level, this benchmark has to follow the market and reflect current market conditions.
The market decides what the large-cap U.S. equities are, not S&P. If S&P excludes some of the largest U.S. companies, which based on their current rules, will exclude all of Anthropic, SpaceX, and OpenAI; then they do a poor job reflecting the benchmark they claim to follow.
It's not S&P's fault that market conditions have changed.
this benchmark has to follow the market and reflect current market conditions
Sure, but right now they don't know how the market will react, so changing the index rules before there's any data would be a measure of their heuristics (e.g. what they believe the market will do), not a measure of what the market is actually doing.
The core issue is that S&P requires companies to be profitable for 12-months to get included in the index. Yet all of SpaceX, OpenAI, and Anthropic are highly unprofitable, because they are prioritizing investing all free-cash-flow into growth instead of returning money to shareholders. These companies likely will not be profitable for years, and without a rule change it's unlikely they will be included in the index anytime soon.
Given these large-cap companies currently represent ~5% of the U.S. stock market capitalization, it's difficult to justify why these companies are excluded from a large-cap index.
Given these large-cap companies currently represent ~5% of the U.S. stock market capitalization, it's difficult to justify why these companies are excluded from a large-cap index.
It's not outside the realms of possibility that the price of the shares post-launch could collapse if the market decides they're over-priced. Shares in companies have been known to settle on valuations far below the IPO price in the past. At that point they won't represent ~5% of the total. Changing the index rules immediately before finding out what's going to happen feels like putting the cart before the horse.
Even assuming a post-IPO valuation drop by 50%, SpaceX would still be a top-25 US company by market cap.
Your "wait and see" argument doesn't apply, because (SpaceX, Anthropic, OpenAI) are excluded from the index for profitability reasons, not valuation reasons. These companies are deliberately reinvesting free-cash-flow into growth rather than booking GAAP profits. That's not going to change 6 months after IPO, and likely not for 3-5 years.
At the current pace, three of the ten largest US companies will not be included in the S&P 500, for probably 5 years after IPO.
The question still remains: should a benchmark that claims to represent large-cap US equities exclude companies that are demonstrably large-cap, just because they allocate their capital towards growing the company instead of generating profits?
Matt Levine, who probably knows more about finance than anyone on this site, has said the same thing. He’s also talked about all the hate mail he gets. Large market etfs like VTI or VOO are supposed to track the market. It would be weird if they ignored trillion+ market cap companies. If the market decides to dump these companies then they’ll fall out of the index.
Index criteria have also changed many times over the years, and they are changing again to deal with later stage companies coming to the market with already huge valuations.
Yes, Matt Levine said that, but he also argued the other side's point of view, as he regularly does.
I completely agree. People have parroted the benefits of passive investing and blindly following the benchmark index for decades, yet the instant some overpriced turds (Anthropic, OpenAI, and SpaceX) are considered being adding to the benchmark, they backtrack and fight tooth and nail against including them.
All three companies are large enough by market cap ($1T+) to qualify for the S&P 500 benchmark, which claims to track the top 500 largest U.S. large-cap equities.
They have a point (not wanting to invest in overpriced equities), but if you don't like the companies that surface through passive investing then don't be a passive investor. It sounds like these people want active investing instead. If that's your position, just buy actively invested funds, not ruin the benchmark for everyone.
S&P is caught in a bind, because if they add these companies to the index, it would aggravate millions of passive investors.
While there's some truth in your point, I think you're being unfair in framing this story as passive investors betraying their own philosophy because they suddenly realize this passivity would cause some "overpriced turds" to be included in their portfolio.
Passive investors did not "backtrack", on the contrary their preference on this matter is that index rules should remain unchanged. Conversely, it seems fully consistent for a passive investor to criticize Nasdaq-100 for actively amending their rules to achieve a specific result.
So I find it rather unfair to conclude that "these people want active investing instead". As far as I know, these people are reacting to "active" decisions (such as Nasdaq-100's) and cheering actual passivity (such as S&P500's decision).
Now, one can argue that there are good and legitimate arguments for the inclusion rules to evolve, but by definition amending the rules is an active decision.
I don't care about being forced to own SpaceX if it's in the index, I do care about it being forced into the index before it's had a chance to settle, so that private investors can dump on me.
But that wasn't going to happen with the S&P 500, the proposal was to reduce inclusion time from 12 months to 6 months, and this did not pass. 6 months is more than enough time for price discovery to occur.
And even if it was added to the index immediately after IPO, index weighting in S&P is float weighted, SpaceX at IPO will have minimal float, and SpaceX would be ~0.125% of the index at IPO. Not much to matter.
That ".125% is not much to matter" argument also cuts the other way, against the Matt Levine argument that the S&P is excluding trillion dollar companies and should adjust the rules for them.
Should S&P really adjust the rules for such a small portion of the index?
Yes, because that number increases to 1-2% of the index after the IPO lockup period ends.
There are three IPOs coming this year that meet this criteria.
Then it seems pretty disingenuous to keep arguing it's only 0.125% so it's not a big deal
Market pricing will be interesting. People have been complaining about TLSA being over priced for years and now it's 2%+ of the S&P. Are people selling VOO and VTI because of the TSLA allocation? Nope, in fact TSLA has made them all a lot of money.
People were falling over themselves to invest in these AI companies and SpaceX not that long ago. 75B worth of SpaceX now has to get sold to IPO investors to hit the desired valuation. People say a lot (especially on the internet), but when the rubber meets the road we'll see what people do with their money.
The other bind the S&P is caught in is if these AI stocks IPO and then moonshot before they get added. The question will then be is the S&P an antiquated index? How do multiple trillion dollar companies in the market not end up in the S&P 500 sooner? No one thinks of that case because everyone is so sure they are all going to zero.
It’s a benchmark of the market under certain rules, like having multiple quarters of earnings for the market to value them at.
These companies want special exceptions. If you are an exception why should you be included in a benchmark? At best they should have an asterisk against their name like Sammy Sosa or Mark McGuire if they are not following the same rules.
Your baseball cheating analogy makes no sense here. Rules against corked bats / steroids exist so people don't cheat at a sport and all players can compete equally. S&P rules are supposed to make the index reflect the market. Totally different.
The profitability requirement is something made up by the S&P committee. If that rule ends up excluding trillions in market cap, the rule has defeated its own purpose. The 12 months of profitability requirement punishes high-growth companies that invest their FCF into growing the business vs taking profits.
It excludes companies like Amazon, which when ran by Bezos, was famously unprofitable and invested all free cash flow into growing the business and never turned a significant profit until >20 years after its founding.
> S&P rules are supposed to make the index reflect the market.
Where did you find that? Link?
I ask because common understanding is that the index is a stable tracker of the market, specifically to exclude volatility.
IOW, it reflects a smoothed market, not a point-in-time-with-daily-granularity market. I would really like to know where you read what you read.
The S&P 500 brochure describes itself as "the best single gauge of large-cap U.S. equities". That language implies they act as a benchmark, which I find questionable, given that based on their current eligibility requirements, it would exclude all three of SpaceX, Anthropic, and OpenAI.
All three companies are in the top 10 largest companies in the US by market cap, based on their current valuations. If these companies maintain their valuations over the next year, they'd still be ineligible under current rules. Because none of them are GAAP, they're all heavily reinvesting cash-flow into growth. These companies may be excluded from the S&P500 for potentially years, until they reach 12 months of profitability.
A benchmark of the U.S. stock market that excludes multiple of the 10 largest U.S. companies cannot be taken seriously.
https://www.spglobal.com/spdji/en/brochure/article/sp-500-br...
> The S&P 500 brochure describes itself as "the best single gauge of large-cap U.S. equities". That language implies they act as a benchmark,
Okay, but isn't that gauge measured over a specific timeframe? Since investors in this index have timeframes in years/decades not days, why would you expect the index to have a ranularity of days?
> That language implies they act as a benchmark, which I find questionable, given that based on their current eligibility requirements, it would exclude all three of SpaceX, Anthropic, and OpenAI.
Sure, but it excludes lots of companies. This specific index is risk-averse and caters to risk-averse investors; regardless of whether the company is SpaceX, Anthropic or OpenAI, rick-averse investors are going to shy away from any share that hasn't been traded long enough for price-discovery to kick in.
S&P 500 weights are based the value of shares available on the public market not the market cap. Based on that SpaceX will be nowhere near the top 10.
Do you think their valuations wouldn't fall dramatically if they were willing to float a significant proportion of their shares on the market anytime soon.
I addressed that exact point here https://news.ycombinator.com/item?id=48407542
Based on previous IPOs, SpaceX will grow to ~40% float by 12 months, thus if it keeps its current valuation unchanged, will remain near the top 10 spot.
Assuming it's share price does not drop significantly because of that.
It currently would exclude all 3 companies because they aren’t publicly traded.
Post IPO they wouldn’t immediately be included. Every benchmark I am aware of doesn’t immediately include companies because there is a decent amount of volatility shortly after, especially due to all the internal stockholders who have restrictions on how quickly they can sell their stock and routinely dump their stock en masse the second those restrictions are lifted.
All the hubbub about benchmarks like Nasdaq right now is because they are altering their rules for these companies in particular and including them much earlier and before what are standard restrictions for employees to sell their stock.
The fear is that massive pension funds whose rules have them rebalance into these benchmarks will be buying up these stocks before that dump and the public’s retirement funds will be made into bagholders.
> Because none of them are GAAP, they're all heavily reinvesting cash-flow into growth. > A benchmark of the U.S. stock market that excludes multiple of the 10 largest U.S. companies cannot be taken seriously.
Ok, now I know not to take you seriously if you can recognize companies aren’t following GAAP but think it’s wrong to not treat them the same. I don’t even know if it’s true that they aren’t following GAAP, but everytime a company tries to argue why they aren’t following GAAP but instead their own magic formula that shows how successful they are, we get another Enron or Theranos.
What is it a benchmark for? All investable public stocks or the economy writ large?
Neither? What makes you think it was supposed to be a benchmark for either.
Amongst other thing weights are based on the value of shares that are traded publicly, not market cap.
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> Rules against corked bats / steroids exist so people don't cheat at a sport and all players can compete equally.
> The profitability requirement is something made up by the S&P committee.
Those are both equally made up. In this case the rules are being changed for new entrants into the market such as SpaceX for the Nasdaq and other benchmarks that are allowing it for that none of the previous companies in said index were allowed to get in under.
And since it’s 15 days and I know most companies have lockout terms on the order of months for various levels of stock, I’m hesitant to believe this won’t modify the benchmarks beyond what has happened with previous inclusions.
`JumpCrisscross’s reply to one of my other comments on this thread in regards to the S&P being a committee based decision actually has had me pause to think, but your argument that the rules are arbitrary so it can’t be cheating like my baseball analogy fails to land.
Baseball rules exist to prevent cheating. The S&P rules exist so the index can accurately reflect the market. When S&P rules end up excluding a significant part of the market with trillions in real market cap, that means the rules are badly designed and broken by its own standard. You're trying to compare updating badly written S&P 500 rules to cheating, which makes no sense at all. They are completely different.
And calling out how the rules are being changed for new entrants into the market such as SpaceX on Nasdaq proves my point. Index providers are already quietly admitting their criteria are too rigid.
Even S&P adjusted their rules to allow SpaceX into the index, although only for the total market index.
https://press.spglobal.com/2026-06-04-S-P-Dow-Jones-Indices-...
"The S&P rules exist so the index can accurately reflect the market", the rules exist to reflect a subset of the market, and the committee chooses that subset. It's their subset so they get to set the rules, you don't have to use it if you don't want to. If you don't like that subset then create your own index. Then you just need to convince others to use it.
Per the S&P 500 website, the claimed subset of the market is "U.S. large-cap equities". S&P claims their index is "best single gauge of U.S. large-cap equities". But, it's clear that given the current iteration of the rules, none of the major upcoming IPOs of Spacex, Anthropic, or OpenAI are eligible for S&P500 inclusion, and they likely will not be for years.
Claiming to have the "best single gauge of U.S. large-cap equities", yet having rules that exclude three of the top 20 largest U.S large-cap equities which make up ~5% of the total market cap of the U.S. stock market, means your benchmark is inaccurate by my book.
"means your benchmark is inaccurate by my book.", and like The Dude says "Yeah? Well, you know, that's just like uh, your opinion, man."
Create your own benchmark, and you can say it is a subset of "U.S. large-cap equities" and "best single gauge of U.S. large-cap equities" and let the market decide who does a better job.
> accurately reflect the market. When S&P rules end up excluding a significant part of the market with trillions
Define what that means? The weights are based on the value of shares available publicly, not market cap. So even if included SpaceX wouldn't even be in the top 20 and have a lower weight than Johson & Johson.
A lot of what people are saying here seems to be based on a misconception of what S&P 500 is supposed to be. Maybe it became the most popular index because of those rigid rules?
> Baseball rules exist to prevent cheating.
> The S&P rules exist so the index can accurately reflect the market.
I personally believe that accurately reflecting a market involves not allowing cheating. I personally believe that getting to change the rules so that your IPO gets included before the general market can discern your value because of your connections to the benchmarks is cheating.
If you want to disagree with me on these points then please do so, but understand why I am claiming that this behavior is cheating.
> getting to change the rules so that your IPO gets included before the general market can discern your value because of your connections to the benchmarks is cheating.
I disagree with you because you are vastly exaggerating the scope and effects of the proposed rule change. S&P was going to decrease their minimum index inclusion time from 12 months to 6 months. 6 months is far more than enough time for the market to decide a fair price of an equity. The rule change never ended up happening, hence this post.
There is zero "cheating", I don't understand why you keep harping on that.
> 6 months is far more than enough time for the market to decide a fair price of an equity
6 months from when? The IPO with its minimal float?
> 6 months is far more than enough time for the market to decide a fair price of an equity.
I disagree.
> The rule change never ended up happening, hence this post. There is zero "cheating", I don't understand why you keep harping on that.
The S&P ended up not making the change. Other benchmarks like the Nasdaq did, and they went way faster than 6 months. The Nasdaq specifically is going to allow these firms to be included after 15 days.
It may be used as a benchmark, but that’s not actually the purpose of it. The purpose is to serve as a way for people to invest in a representative sample of the market. It can still be a representative sample with safeguards. If you want a benchmark without safeguards, you can calculate one without risking millions of people’s life savings.
You have your history backwards. The S&P 500 was created in 1957 as a benchmark. The first investable index fund tracking it (Vanguard's) wasn't created created until 1976. Vanguard created their fund to track the benchmark, not the other way around.
And if you need a second, different index to function as the true market benchmark because the S&P 500 no longer reflects the actual market, then you just agreed the S&P 500 is no longer an adequate benchmark. You just agreed with my point.
Because it's selective, the S&P by definition does not reflect the actual market. It reflects a subset of it.
If you're comfortable with this notion of what the S&P does, then you ought to be comfortable with S&P applying the same methodology they've always used. There are other indexes you can reference if this particular sampling of the market isn't to your personal liking.
The S&P's historical inclusion criteria were designed to filter out unstable, illiquid questionable companies to get a view of large-cap US equities. That logic worked when every major American company was public and profitable.
That's not true any more. Today we have multiple giga-caps (SpaceX, Anthropic, OpenAI) vying to IPO, all of which potentially in the top 20 largest companies in the US market, all ineligible for S&P 500 inclusion because of the 12-month profitability rule.
You claim S&P can "apply the same methodology they've always used" but this is just factually wrong. The inclusion criteria are not sacred rules set in stone and S&P has rewrote them multiple times. For example, they banned dual-class share structures in 2017 to stop SNAP from joining the index, but reversed it in 2023 because they excluded too many companies. The rules get rewritten when the market changes, and it's clear the current market environment has changed.
Meanwhile, Nasdaq changed their rules to handle this situation. And S&P changed the inclusion criteria for the S&P Total Market Index so SpaceX would be included.
It's clear these inclusion rules are changing.
> out unstable, illiquid questionable
So Space X, OpenAI, Anthropic? Those are perfect examples.
It's unlikely their valuations could survive the IPO if their float wasn't extremely low.
> top 20 largest companies in the US market
You do know that S&P weights are based on the free float and not the market cap. So based on that SpaceX etc. will not be in the top 20. The total value of shares of Johnson & Johnson available on the public market will be much higher than that of SpaceX/etc. based on their current valuations.
Then your issue is not the S&P methodology, which despite changes in detail remains, as you've said, aimed at filtering out undesirable companies from the index. Your issue is that you want us to believe your favorite tech stocks, which are both wildly unprofitable and have P:S ratios that defy rational investment, are somehow desirable immediate additions to the index. And your argument for why this should be is a lofty claim that "the market environment has changed."
You believe in brand power over numbers. Which is your prerogative. But it's not how the S&P is managed.
> the S&P 500 no longer reflects the actual market
Well it was never intended to reflect the full "actual market".
> no longer an adequate benchmark
According to your definition it never was. However there were and are plenty of other index benchmarks which serve different purpose. Its just that S&P 500 managed to become the most popular one, why did it happen if it was always inherently flawed?
Like they didn't even add Microslop for 8 years...
Good for the SP500 but I don’t think it’s true that indexes need to be slow moving. They can serve any purpose! Comparatively I think it makes sense Nasdaq100 would want to include it earlier. Not all indexes need to be slow moving or representative of a buy and hold type strategy. Maybe you only want to capture the highest volume in daily activity for example.