>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.