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SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

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Re: SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

#341

Post by CuriouslyC »

tristanj wrote: post #268
matwood wrote: post #214

Earlier quoted context omitted.

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…

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 t…

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.

Re: SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

#342

Post by tristanj »

notahacker wrote: post #317
tristanj wrote: post #259

Earlier quoted context omitted.

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 bench…

> 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…

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.

Re: SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

#343

Post by malfist »

yorwba wrote: post #294
pid-1 wrote: post #287

Earlier quoted context omitted.

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

Re: SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

#344

Post by tristanj »

CuriouslyC wrote: post #341
tristanj wrote: post #268

Earlier quoted context omitted.

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 t…

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.

Re: SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

#345

Post by qnpnpmqppnp »

tristanj wrote: post #195
qnpnpmqppnp wrote: post #192

Earlier quoted context omitted.

> 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?

Re: SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

#346

Post by felixgallo »

dmurray wrote: post #238
imtringued wrote: post #204

Earlier quoted context omitted.

>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…

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 incenti…

'their customers, in aggregate, want that' citation needed

Re: SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

#347

Post by tristanj »

onion2k wrote: post #304
tristanj wrote: post #270

Earlier quoted context omitted.

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…

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. A…

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?

Re: SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

#348

Post by yyhhsj0521 »

tristanj wrote: post #326
Applejinx wrote: post #315

Earlier quoted context omitted.

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…

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, w…

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.

Re: SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

#349

Post by yfg2 »

Nykon wrote: post #116
yfg2 wrote: post #89

Earlier quoted context omitted.

Why do index inclusion rules exist in the first place….? Go do a google search

I feel like a lot of people discussing here have no clue what they're talking about, they just have an opinion - which, combining both, most likely means it's an opinion they did not form themselves. The rules for index inclusion absolutely make sense in many ways.

[dead]

Re: SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

#350

Post by qnpnpmqppnp »

tristanj wrote: post #268
matwood wrote: post #214

Earlier quoted context omitted.

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…

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 t…

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.

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