Comment by JumpCrisscross
19 hours ago
> sensible thing to do is to create a new index with the new rules
It depends. Indices aren’t funds. They aren’t meant to balance investor interests. They’re meant to communicate some metric about the market.
The S&P tells you how big companies are doing in an index optimized to balance representation against trading cost. So in 2005, float was taken into account for weighting (versus just market cap). This made sense. Also, since the start, the S&P 500 has been a committee-based index. Not rule based. This has made it successful; if you want stable and unchanging, you never went for the S&P 500.
The S&P 500 may not be a fund itself, but Standard & Poor's is a business whose ability to sell services is correlated with the continued relevance of the S&P 500. It absolutely does balance interests - namely, its own - beyond simply being an academic vehicle for communication of a stable thesis.
It seems entirely reasonable to say: "if we make a certain decision, we correlate both our reputation and a nontrivial portion of the U.S. economy with the whims of one of the most volatile personalities in industry, and we should likely pay attention to this trial balloon that shows such anticipatory fear of the decision that we might lose our reputation as an index altogether."
> absolutely does balance interests - namely, its own - beyond simply being an academic vehicle for communication of a stable thesis
As a business, sure. As a committee, it’s still a deeply technical process. I can say with a lot of confidence that optics weren’t considered in any of this, possibly to a fault.
> and a nontrivial portion of the U.S. economy
This vastly overstates the amount of assets tied to the S&P 500. It’s a lot. But it’s a strong minority of equity exposures.
> I can say with a lot of confidence that optics weren’t considered in any of this, possibly to a fault.
How can you possibly know that? Do the people on that committee have a cast-iron tenure guarantee?
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There's overlap between strong minority and nontrivial, so not sure how it can be vastly overstated. Do you have numbers you can add to this, or any explanation of equity exposure etc?
Indexes are not funds, correct.
However, the SP500 index is one of the few indices that is strongly represented in 401K plan options.
That changes its role from "communicate some metric about the market" to forced buying of the metric.
which makes changing the metric, especially in such a drastic way, consequential.
an etf that tracks the S&P 500 is what then?
This is a big win for many S&P 500 etf holders
Exactly. The S&P 500 isn't a fund, but let's not pretend that inclusion in the index doesn't mean real money is at stake.
> let's not pretend that inclusion in the index doesn't mean real money is at stake
Straw man. Nobody claims this. The point is (a) the state of decisionmaking was misrepresented for clicks and (b) the effects of a decision one way or the other way way overblown.
Hating on Musk sells subs. That's fair and, frankly, deserved. It doesn't mean we need to get misled chasing that high.
> They’re meant to communicate some metric about the market.
Is that why people spend time, money and effort creating and maintaining them? They're just broadcasters? That seems dubious.
> Is that why people spend time, money and effort creating and maintaining them? They're just broadcasters?
Yes. There are more indices than there are stocks. Publishing an index is, business wise, a game of getting funds to license them.
Once you have an index, you can offer all sorts of products around it.
-You can offer a return swap to an investor so he can "invest" in the index. You can alternatively build a whole list of derivatives and products around it and offer them to investors instead (think Itraxx,Vix,etc)
-A fund manager can use it as his benchmark and you get to see if he is good or not.
-If its a factor index you can now use it for risk management and return attribution.
The key thing today is that creating a new index that isn't a fad is very hard. There has also been a lot of consolidation of indices into few players (SP, MSCI, Bloomberg) as it's obviously an economies of scale business.
I mean, they get paid for it, sometimes quite a lot, for this "broadcasting". $100mm of AUM gets you like $200k profit/yr. (Like $500k minus fees)
The market cap of the S&P 500 according to Google is ~$65T. Anthropic, OpenAI and SpaceX could well amount to $4T+ in market cap. That's ~6% of the entire index. It's like adding another NVidia. That's a big deal.
The rules around index inclusion exist for a reason. Too much control in one person's hands (which SpaceX has), too small a float (so you don't get price discovery), lack of a history of financial performance and minimal trading days just don't give investors confidence and, like it or not, investment decisions are made based on the index. If you want to argue against passive investment, well, good luck with that.
I think a lot of people have this weird idea that what we need is some theoretically unfettered market for "true" price discovery when it's actually regulations like this that create markets. It's like a libertarian brain worm.
I don't think anybody wants these mega-companies out of the index, specifically. They just don't see why rules that exist for a reason should be suspended when the net effect of that is that investors have less information and there is a lot of forced purchasing. If you have confidence in your IPO, let the market decide what it's worth without trying to fix the price because what they seem to want is for insider lock-ups to end about the time we'd otherwise be getting normal price discovery. Kinda weird.
Investor confidence needfs to be managed by creating a stable, regulated market.
> Anthropic, OpenAI and SpaceX could well amount to $4T+ in market cap. That's ~6% of the entire index. It's like adding another NVidia.
This is a common misconception. The S&P 500 weights allocation by float-adjusted market cap, not by total market cap. In the case of SpaceX, they are planning to float ~4% of shares at IPO. Even if SpaceX was added to the index, its index weight would be based on that tiny float, and at a $1.75T valuation it would be treated as roughly a $70 billion company.
SpaceX weight would be ~0.125% of the index, not ~2.5% as you imply.
Nasdaq "solved" that problem by including a 5x float multiplier for stocks with less than 20% of shares available to the public...
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SoaceX plans to continually unlock float for the first six months of being listed. So the percentage of the index would continue to rise.
except $4T is a made up number, a complete fantasy not rooted in any reality. it us more like $750bn (this is also made up number) :)
All valuations are “made up” numbers.
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The 409a has a lot of words and numbers to justify a particular valuation. It's not made up from the ether based on nothing. You can disagree with their reasoning and come to a different number, but you need to show your work if you want anyone to give a shit about your made up number. How many satellites have you launched this year? What's the going rate for a kilogram to LEO? Who are the competitors and what do they charge? Things like that which aren't magic made up numbers.
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