You protect yourself by understanding that this is one infinitesimally small cost (expressed as a fraction of your portfolio returns) that doesn't overcome the benefits of maximum diversification and the ultra-low fees of broad-based ETFs.
Buy MSCI World, enjoy the 0.04% p.a. fees and minimal idiosyncratic risk, and relax.
Index rebalance traders will reduce your annual returns by less (probably much less) than 0.1%, but there is no better alternative for you at this moment in time.
I broadly agree. Though I'm less pessimistic: lots of people will pay lots of attention to SpaceX and friends, and with short selling in public markets being possible, an accurate price will be established very quickly.
Remember also: index funds are some of the participants most keen to lend out their shares to short sellers. It's one of the rare ways they can boost returns above the raw index they follow.
> and with short selling in public markets being possible, an accurate price will be established very quickly.
I know very little about markets, but: aren't the short-sellers just going to provide liquidity for the big index funds? Like, if the funds HAVE to buy SpaceX, and the funds are enormous, wont every single stock sold short be immediately gobbled up, as well as pretty much anyone else wanting to sell? Even if everyone else is selling like mad, it wont affect price much at all?
Maybe this is naive, but if these enormous funds are more or less forced to buy SpaceX, it seems impossible that "actual price discovery" is going to happen in any reasonable amount of time, and the short-sellers will be screwed.
Here are some options for pre-tax retirement funds (ex. 401k):
1. Exchange your market-cap funds for S&P 500. Afaict, even with their own rules changing, they will wait up to 6 months (as opposed to 12) to let SpaceX in. This is the simplest solution that buys you time without losing other gains in the market, assuming your existing funds were broad market-cap funds. The idea here is to wait for ~5 months and see if you still want/need to exit S&P before they let SpaceX in, or pick another option.
2. Exchange your market-cap funds for RSP, an equal-weight fund. This is also simple and reduces your risk, as SpaceX's allocation of the fund would only be 0.2%.
3. Exchange your market-cap funds for a selection of different funds in order to replicate the previous allocation. Buy small-cap and mid-cap funds, and buy ETFs that cover the market without including tech. This is more complicated, but not really that complicated once you learn how to exchange funds. Still mostly passive, you're just actively managing your allocation into different indexes. Downside is you lose the gains from tech.
4. Exchange all your index funds - temporarily - for a money market fund or other low-risk, low-return investment vehicle, until SpaceX price settles down. This is the absolute simplest option, least risk, least reward. You lose all the gains from the market during this time, but a percentage of your fund doesn't disappear overnight. If you're nervous, it's safe to do this by June 11th and sit on it until July 5th and see what you'd like to do then.
You probably DO NOT want to do this for non-retirement funds, as you will get hit with capital gains taxes. You would have to estimate how much you think your portfolio would drop due to SpaceX's overinflated price falling, and compare that to your potential tax bill from rebalancing. It's almost certain that your tax hit would be higher.
You could move your passive investment to an index that includes a great proportion of bonds or move to an entirely bond based index. You reduce the upside potential and downside potential.
I personally have moved my retirement accounts to bonds while being more aggressive with my personal investments.
Not buy these index funds. If you don’t want to own the entire market, don’t buy funds that seek to own the entire market. Funds like ESGV which exclude companies with poor governance have existed for a very long time - I can’t find a clear answer as to whether or not it will buy SpaceX, but I’m sure you can find funds that cater to your desires.
That ignores the actual issue here, which is the change in rules. Index funds already seek to own the entire market, and when most people chose these index funds there were rules about when newly listed stocks get purchased by the funds. And now those rules are being changed.
Index funds generally try to match the performance of the index, but most are not required to hold the same companies as the index itself does. They typically do, but managers often have choices.
The problem is I'm already in a S&P500-tracking ETF, for a decently large amount of money. Selling it off would be a big taxable event for me, something I don't want to do.
Could you use a prediction market (or Spread Betting in the UK) to hedge against your ETF loosing money during the period? If the ETF lost value, the hedge would gain it back and vice versa. You wouldn't need to sell the ETF and you'd only be liable for tax on gains from the prediction.
However they are literally changing the rules of what "the entire market" means to include those companies sooner that they would have been when people bought those indices.
If you intend to remain a passive investor, keep doing what you’re doing. If you have conviction that AI boom will bust and you want to become an active investor, follow the advice from other comments on how to prevent these companies from being part of your portfolio. If you're going to become an active trader, I suggest thinking about both upside and downside risks and look beyond the local echo chamber.
Here are some factors I would expect to rule out the frothiest stocks:
"Quality Factor ETFs are made up of securities deemed to exhibit strong fundamental characteristics. These ETFs screen for stocks that have healthy balance sheets, encouraging growth prospects, and consistent improvements in their earnings."
"Value-centric ETFs invest in securities deemed to possess value characteristics, including those operating in stable industries with relatively low price-to-earnings ratios."
"Low Volatility ETFs invest in securities with low volatility characteristics. These funds tend to have relatively stable share prices, and higher than average yields."
Be sure to check the expense ratios on smart beta ETFs. Generally, the more sophisticated the stock screening, the more they will charge you in management fees.
Personally, I keep my portfolio extremely conservative. My bet is that if the singularity arrives, we will all either die, or get UBI. I don't particularly care about having more moons than the other guy: https://www.astralcodexten.com/p/you-have-only-x-years-to-es...
That’ll do precisely zero to protect against the effect described. In fact the opposite - the dividend paying stocks will by mathematically necessity be among those ETFs sell down to buy these IPOs
I believe you may have gotten discussion threads mixed up, but in any case: I expect that as SpaceX investors sell their SpaceX stock, they will buy ordinary equities to diversify.
You protect yourself by understanding that this is one infinitesimally small cost (expressed as a fraction of your portfolio returns) that doesn't overcome the benefits of maximum diversification and the ultra-low fees of broad-based ETFs.
Buy MSCI World, enjoy the 0.04% p.a. fees and minimal idiosyncratic risk, and relax.
Index rebalance traders will reduce your annual returns by less (probably much less) than 0.1%, but there is no better alternative for you at this moment in time.
I broadly agree. Though I'm less pessimistic: lots of people will pay lots of attention to SpaceX and friends, and with short selling in public markets being possible, an accurate price will be established very quickly.
Remember also: index funds are some of the participants most keen to lend out their shares to short sellers. It's one of the rare ways they can boost returns above the raw index they follow.
> and with short selling in public markets being possible, an accurate price will be established very quickly.
I know very little about markets, but: aren't the short-sellers just going to provide liquidity for the big index funds? Like, if the funds HAVE to buy SpaceX, and the funds are enormous, wont every single stock sold short be immediately gobbled up, as well as pretty much anyone else wanting to sell? Even if everyone else is selling like mad, it wont affect price much at all?
Maybe this is naive, but if these enormous funds are more or less forced to buy SpaceX, it seems impossible that "actual price discovery" is going to happen in any reasonable amount of time, and the short-sellers will be screwed.
Here are some options for pre-tax retirement funds (ex. 401k):
1. Exchange your market-cap funds for S&P 500. Afaict, even with their own rules changing, they will wait up to 6 months (as opposed to 12) to let SpaceX in. This is the simplest solution that buys you time without losing other gains in the market, assuming your existing funds were broad market-cap funds. The idea here is to wait for ~5 months and see if you still want/need to exit S&P before they let SpaceX in, or pick another option.
2. Exchange your market-cap funds for RSP, an equal-weight fund. This is also simple and reduces your risk, as SpaceX's allocation of the fund would only be 0.2%.
3. Exchange your market-cap funds for a selection of different funds in order to replicate the previous allocation. Buy small-cap and mid-cap funds, and buy ETFs that cover the market without including tech. This is more complicated, but not really that complicated once you learn how to exchange funds. Still mostly passive, you're just actively managing your allocation into different indexes. Downside is you lose the gains from tech.
4. Exchange all your index funds - temporarily - for a money market fund or other low-risk, low-return investment vehicle, until SpaceX price settles down. This is the absolute simplest option, least risk, least reward. You lose all the gains from the market during this time, but a percentage of your fund doesn't disappear overnight. If you're nervous, it's safe to do this by June 11th and sit on it until July 5th and see what you'd like to do then.
You probably DO NOT want to do this for non-retirement funds, as you will get hit with capital gains taxes. You would have to estimate how much you think your portfolio would drop due to SpaceX's overinflated price falling, and compare that to your potential tax bill from rebalancing. It's almost certain that your tax hit would be higher.
I asked this the other day. The response was to buy VGT instead of QQQ https://news.ycombinator.com/item?id=48324097#48334357
You could move your passive investment to an index that includes a great proportion of bonds or move to an entirely bond based index. You reduce the upside potential and downside potential.
I personally have moved my retirement accounts to bonds while being more aggressive with my personal investments.
Not buy these index funds. If you don’t want to own the entire market, don’t buy funds that seek to own the entire market. Funds like ESGV which exclude companies with poor governance have existed for a very long time - I can’t find a clear answer as to whether or not it will buy SpaceX, but I’m sure you can find funds that cater to your desires.
That ignores the actual issue here, which is the change in rules. Index funds already seek to own the entire market, and when most people chose these index funds there were rules about when newly listed stocks get purchased by the funds. And now those rules are being changed.
Index funds generally try to match the performance of the index, but most are not required to hold the same companies as the index itself does. They typically do, but managers often have choices.
> Index funds already seek to own the entire market, [...]
No, it depends on the index in question.
The problem is I'm already in a S&P500-tracking ETF, for a decently large amount of money. Selling it off would be a big taxable event for me, something I don't want to do.
Could you use a prediction market (or Spread Betting in the UK) to hedge against your ETF loosing money during the period? If the ETF lost value, the hedge would gain it back and vice versa. You wouldn't need to sell the ETF and you'd only be liable for tax on gains from the prediction.
Would you be taxed even if you put it straight into another fund? Genuine question.
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Index funds don't represent "the entire market" anyway. They are a diversified selection of stocks choosen according to some rules.
However they are literally changing the rules of what "the entire market" means to include those companies sooner that they would have been when people bought those indices.
If you intend to remain a passive investor, keep doing what you’re doing. If you have conviction that AI boom will bust and you want to become an active investor, follow the advice from other comments on how to prevent these companies from being part of your portfolio. If you're going to become an active trader, I suggest thinking about both upside and downside risks and look beyond the local echo chamber.
Become active investors.
There are many large cap ETFs out there:
https://etfdb.com/etfs/size/large-cap/
You could switch to one that focuses on stocks which pay dividends, for example. That should provide a bit of protection against an AI market crash:
https://etfdb.com/etf/VIG/#etf-ticker-profile
So-called "smart beta" ETFs are also interesting. https://etfdb.com/themes/smart-beta-etfs/
Here are some factors I would expect to rule out the frothiest stocks:
"Quality Factor ETFs are made up of securities deemed to exhibit strong fundamental characteristics. These ETFs screen for stocks that have healthy balance sheets, encouraging growth prospects, and consistent improvements in their earnings."
https://etfdb.com/themes/quality-factor-etfs/
"Value-centric ETFs invest in securities deemed to possess value characteristics, including those operating in stable industries with relatively low price-to-earnings ratios."
https://etfdb.com/etfs/style/value/
"Low Volatility ETFs invest in securities with low volatility characteristics. These funds tend to have relatively stable share prices, and higher than average yields."
https://etfdb.com/etfs/investment-style/low-volatility/
Be sure to check the expense ratios on smart beta ETFs. Generally, the more sophisticated the stock screening, the more they will charge you in management fees.
As long as you're thinking about your portfolio, you may wish to consider international diversification in case the US economy implodes somehow: https://etfdb.com/themes/international-equity-etfs/
Personally, I keep my portfolio extremely conservative. My bet is that if the singularity arrives, we will all either die, or get UBI. I don't particularly care about having more moons than the other guy: https://www.astralcodexten.com/p/you-have-only-x-years-to-es...
That’ll do precisely zero to protect against the effect described. In fact the opposite - the dividend paying stocks will by mathematically necessity be among those ETFs sell down to buy these IPOs
I believe you may have gotten discussion threads mixed up, but in any case: I expect that as SpaceX investors sell their SpaceX stock, they will buy ordinary equities to diversify.
Move your investments to funds that won’t automatically buy spacex stocks
Moving investments usually means taxable events, which we like to avoid if possible.
Not in retirement accounts