Note that index funds don't hold companies in proportion to their market cap, but in proportion to their free float (shares available to purchase on the market).
Both SpaceX and OpenAI's estimated free float are around 4-5% of their shares at IPO. This means that we really are talking about companies in the sub $100M valuation in term of index fund impact (assuming under $2T for each).
That's true for the S&P but not nasdaq, nasdaq is market cap weighted. There used to be a limit that the available float couldn't go below something like 20%. (This is because 5% float available but 100% market cap would cause a huge supply/demand mismatch). But for spacex they changed the rule so there's no minimum, it's just that below 20% float, companies would be weighted at 5x the float instead of 100% of market cap. If spacex is planning on something like 5% float, it would be weighted around 25% of market cap with only 5% of float available to buy.
But it gets worse because when the lock-up period expires in 180 days after ipo (currently scheduled right before quarterly index rebalancing), it's possible that frees up more than 20% of float and it suddenly has to be weighted at the full 100% of market cap -- triggering additional automatic buying.
It certainly seems like it's set up for our retirement accounts to be the insider's exit liquidity.
> it's possible that frees up more than 20% of float and it suddenly has to be weighted at the full 100% of market cap
In your scenario, that 100% cap would by definition be less than 5x float so it shouldn't trigger any more buying than the lock-up expiration itself did.
Collectively, Alphabet (Google), Amazon, Microsoft, and Nvidia already own approximately 25 - 35% of OpenAI and Anthropic respectively. They already are a part of your portfolio.
This kind of indirect exposure might look good on paper but it's never even remotely a linear mapping in practice. Holding the underlying directly is the best bet if you want to minimize the possibility of getting screwed over by external factors while maximizing your practical exposure. It really sucks to be right and still get punished for it because Xbox or windows shit the bed last quarter.
Agreed. The mere "mass" of these companies dampen any movement that the underlying asset has. I mean, in a earning call it might just be a line item in the "Others" section. And even if they made/lost billions it is a small % of the quarterly profits of such companies.
Afaik, Nasdaq removed the seasoning rules to include it from the start, S&P would usually be only a year after IPO but they are also discussing changes
Absolutely, I moved all my investments to single stocks that I thought would do well that decision the best that I’ve ever made from an investment standpoint, the returns are infinitely better…
What is the problem? If you buys a SP500 ETF you're effectively buying 500 stocks. You don't need that much, but if that is your wish it is still better than using ETFs.
It is very true what they said. In an ETF you get both bad stocks and good. You have no choice.
If you diversify manually you can pick and choose only the crème de la creme
But… people love to be lazy or just aren’t knowledgeable enough to pick their stocks themselves and thus it is safer for them to just stick to broad strokes of an index fund.
For starters as basic portfolio, you could 1:1 an index fund but take out all the garbage from it and keep only the strong, bright future companies.
ETF are just noob introduction to the stock market and great one at that but to maximize returns you want to be more specific and intentional about your picks.
Where etfs are great even after you learn a lot, is exposure to whole sectors of the industry. That’s how I treat them: one - etf - an index of how a particular industry fares.
Source: I basically live solely from investments at 30
Note that index funds don't hold companies in proportion to their market cap, but in proportion to their free float (shares available to purchase on the market).
Both SpaceX and OpenAI's estimated free float are around 4-5% of their shares at IPO. This means that we really are talking about companies in the sub $100M valuation in term of index fund impact (assuming under $2T for each).
That's true for the S&P but not nasdaq, nasdaq is market cap weighted. There used to be a limit that the available float couldn't go below something like 20%. (This is because 5% float available but 100% market cap would cause a huge supply/demand mismatch). But for spacex they changed the rule so there's no minimum, it's just that below 20% float, companies would be weighted at 5x the float instead of 100% of market cap. If spacex is planning on something like 5% float, it would be weighted around 25% of market cap with only 5% of float available to buy.
But it gets worse because when the lock-up period expires in 180 days after ipo (currently scheduled right before quarterly index rebalancing), it's possible that frees up more than 20% of float and it suddenly has to be weighted at the full 100% of market cap -- triggering additional automatic buying.
It certainly seems like it's set up for our retirement accounts to be the insider's exit liquidity.
> it's possible that frees up more than 20% of float and it suddenly has to be weighted at the full 100% of market cap
In your scenario, that 100% cap would by definition be less than 5x float so it shouldn't trigger any more buying than the lock-up expiration itself did.
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"free-float adjusted" is the key term
5% of 2T would be $100B, not $100M.
Collectively, Alphabet (Google), Amazon, Microsoft, and Nvidia already own approximately 25 - 35% of OpenAI and Anthropic respectively. They already are a part of your portfolio.
This kind of indirect exposure might look good on paper but it's never even remotely a linear mapping in practice. Holding the underlying directly is the best bet if you want to minimize the possibility of getting screwed over by external factors while maximizing your practical exposure. It really sucks to be right and still get punished for it because Xbox or windows shit the bed last quarter.
Agreed. The mere "mass" of these companies dampen any movement that the underlying asset has. I mean, in a earning call it might just be a line item in the "Others" section. And even if they made/lost billions it is a small % of the quarterly profits of such companies.
Afaik, Nasdaq removed the seasoning rules to include it from the start, S&P would usually be only a year after IPO but they are also discussing changes
What will managed funds do?
Are we now suggesting people get out of index funds?
Worse, will this and spacex ipo destroy the index funds?
The important thing to remember is:
- With the SP500 you're not that diversified because you're very exposed to the tech sector
- With a world ETF like MSCI World you're still extremely exposed to US stocks (about 70%) and of course the tech sector
Destroy is a strong word. Rather, it will make the pension funds and passive investors the bag holders for the oligarchs.
> Rather, it will make the pension funds and passive investors the bag holders for the oligarchs.
Care to explain the mechanics? I’m an investor (both in passive and more active vehicles) and don’t understand what you mean.
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So these extremely risky companies will become a big part of American retirement funds.
I am sure nothing bad will happen
Upside of robo advisors?
ETFs are a trap. Put most of your money in single stocks. It is ok to diversify, you don't need an ETF for this.
> It is ok to diversify
Nay, it is not just “ok”. It is imperative that you diversify if you want a strong and resilient portfolio.
Oops wrong comment
Absolutely, I moved all my investments to single stocks that I thought would do well that decision the best that I’ve ever made from an investment standpoint, the returns are infinitely better…
This is terrible advice, are you buying and self balancing hundreds of different stocks?
What is the problem? If you buys a SP500 ETF you're effectively buying 500 stocks. You don't need that much, but if that is your wish it is still better than using ETFs.
I can’t say I’ve tried this but the thought just came to me that generating such trades would be trivial to do monthly now.
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Direct indexing is a thing.
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It is very true what they said. In an ETF you get both bad stocks and good. You have no choice. If you diversify manually you can pick and choose only the crème de la creme But… people love to be lazy or just aren’t knowledgeable enough to pick their stocks themselves and thus it is safer for them to just stick to broad strokes of an index fund. For starters as basic portfolio, you could 1:1 an index fund but take out all the garbage from it and keep only the strong, bright future companies.
ETF are just noob introduction to the stock market and great one at that but to maximize returns you want to be more specific and intentional about your picks.
Where etfs are great even after you learn a lot, is exposure to whole sectors of the industry. That’s how I treat them: one - etf - an index of how a particular industry fares.
Source: I basically live solely from investments at 30
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I prefer the casino.
return on the average stock is -2% iirc, terrible idea