Comment by tristanj
16 hours ago
Because the index needs accuracy. 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. The longer this company is not in the index, the longer this error compounds.
In the coming few months, multiple giga-cap companies (SpaceX, OpenAI, Anthropic) are all planning to IPO. These companies will likely never meet S&P profitability inclusion criteria for the next 5 years. These are not bad companies, but because the S&P inclusion criteria were written for old GAAP profitable companies, and not high-growth companies that invest their cashflow into company growth over profits. Excluding some of the most civilization changing companies from the benchmark means the benchmark is doing a terrible job.
"Because the index needs accuracy.", and I would argue that include price accuracy not just inclusion accuracy. The S&P is a benchmark that is designed to reflect a subset of the market, and giving only some companies early access to the benchmark changes the benchmark. So if you want a benchmark that's designed to include all the big stocks regardless of age, profitability, etc then go make a new benchmark. The only thing you need to do is convince others to use your benchmark.
"go make a new benchmark" completely ignores how this works in practice. Benchmarks are only useful because everyone uses the same one, you can't swap it out. The S&P 500 benchmark is used as a comparison for trillions of dollars of mutual funds, index funds, and institutional mandates. The further the S&P 500 strays from reflecting the actual market, the more useless it becomes.
Also the S&P criteria have been revised multiple times, it's not some sacred unchangeable document.
> The further the S&P 500 strays from reflecting the actual market, the more useless it becomes.
Here I once again agree with you in part, and disagree in part.
The S&P 500 should reflect the actual market. That is, the actual market of publicly-traded companies with legal requirements for transparent accounting and reasonable expectations of future positive cash flows.
As you wrote yourself (https://news.ycombinator.com/item?id=48408363), "These [mega-cap IPO] companies will likely never meet S&P profitability inclusion criteria for the next 5 years."
At this point in time, I don't think it's reasonable to expect future positive cash flows from SpaceX or Anthropic. There are indeed some reasons to suspect that there won't be future positive cash flows from them.
You want to turn S&P 500 to a total market index. Why? That was never its purpose.
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There are indexes which explicitly try to capture the entire market- the Russell 3000 is most prominent, but the Wiltshire 5000 is another one, and Vanguard's Total Market Funds and ETF follow the CRSP US Total Market Index. I believe all of them plan to include SpaceX/OpenAI etc. within a few weeks of its listing, which is what I'd expect from their goal of tracking the total market. Other indexes follow just a few stocks- most famously, the Dow Jones Industrial Average (built during an era of when it had to be calculated by hand every night) looks at just 30 stocks in a weird way(1).
The S&P 500 isn't either of those. It has a list of criteria for inclusion, one of which is profitability. They are sticking with that criteria. If you don't like it, sell your VOO and buy VTI instead.
1: It is essentially impossible to build an index that tracks the DJIA because, since it was done on pencil and paper, it isn't actually market-cap weighted, but is share price weighted, with a correction factor for each stock to account for splits, one stock replacing another, etc. Because of that nature, the weights of the DJIA change minute by minute, so someone attempting to track it would be subject to enormous error.
> Because the index needs accuracy
So you are saying that S&P 500 should be merged with Russell 2000 or rather just become a fully market index to be more "accurate". You do know that's something that exists already, having different indexes makes perfect sense and consumers can pick the ones they want based on their risk profile and preferences.
> most civilization changing companies from the benchmark
It took Google 2 years to get into S&P 500. For Microslop it was 8 years (!). So what's new?
I am saying none of those things. S&P claims their S&P500 index is the "best single gauge of U.S. large-cap equities". That's taken directly from their website.
I dispute this claim, because the (current) rules for S&P500 inclusion exclude companies like SpaceX, Anthropic, and OpenAI. All of these companies are planning to IPO this year, and even if these companies maintain their present valuation for a year, none are eligible for S&P 500. Due to profitability requirements.
Yet these are all U.S. large-cap companies, among the top 20 largest in the U.S., and by S&P's description of the index, should be included. Not including these companies makes the index inaccurate.
> [Google and Microsoft took years go get into the index], so what's new?
Because SpaceX, Anthropic, and OpenAI are $1T+ companies. Google and Microsoft were much smaller relative to the size of the index when they joined.
Best single gauge, not summary. Systematically excluding companies that are large and buzzy yet not profitable is a matter of intentional design to improve the accuracy of the gauge, even if previous companies were not quite this large. Anthropic and OpenAI are great illustrations of why you might want such a design: the bull case for each is that they're going to dunk the other and become the US's primary provider of AI inference, and neither is yet profitable, so by including both of them in the index you're "double counting" investor expectations of how valuable a company producing profitable AI inference will be.
Maybe you know this already, but this reads like exactly the kind of reasoning that people looking back at irrational market euphorias point to as a sign things were about to go awry.
The purpose of a benchmark is to reflect the market. If the US economy is pumping out high-growth but overpriced & unprofitable companies via IPOs, at unreasonable valuations, the benchmark should reflect that.
It's not S&P's fault this is happening.
On the contrary. There are many benchmarks, some small subset of which are intended to reflect the whole market.
There are indices for every little thematic and niche corner or strategy or idea, there are broad-as-possible indices, and there are indices with requirements like listed age and profitability.
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> 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?
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> Because the index needs accuracy.
No, it doesn't. At least, not the way you are probably defining it.
This sounds to me like you may be trying to use the index for something it's not really meant to be used for.
What is the S&P 500 meant for then? It was created in 1957 as a benchmark of US equity performance. That's S&P Global's own stated purpose. If it's systematically excluding companies that represent significant chunks of total US market cap, the index isn't doing its job.
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 the market through your giant market move… or commit to being a giant bubble of fraud that can never possibly blow up, forever.
These are not responsible ways to make vast sums of money, not because they're unethical but because they're gambles at very high stakes.
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But it is not 1-2% of the total US market cap, is it?
It aspires to be that way. The market decides, and it hasn’t decided yet.
Am I missing something?
> If a company is 1-2% of the total US market cap
Over what time horizon should that number be computed? Every day? Every second? Every month/quarter?
It is not as simple as it seems.
> These companies will likely never meet S&P profitability inclusion criteria for the next 5 years.
They won't stay gigacaps for 5 years if they don't become profitable. At their size, they can't just keep burning money at that scale under the public's eyes. The funding will divert from VC to shareholder equity and that will quickly see they don't stay gigacaps.
So this is a self correcting problem. Either they'll start making money and hit profitability targets or their market cap will diminish.
I'm with you on this part:
> Because the index needs accuracy. 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. The longer this company is not in the index, the longer this error compounds. In the coming few months, multiple giga-cap companies (SpaceX, OpenAI, Anthropic) are all planning to IPO.
I'm nodding vigorously on this part:
> These companies will likely never meet S&P profitability inclusion criteria for the next 5 years.
But here, you lose me…
> These are not bad companies, but because the S&P inclusion criteria were written for old GAAP profitable companies, and not high-growth companies that invest their cashflow into company growth over profits. Excluding some of the most civilization changing companies from the benchmark means the benchmark is doing a terrible job.
The point of investing in a total(ish) index of the public stock market is to invest in companies that have a reasonable expectation of net-positive future cash flows, justified in part by legally-mandated transparent reporting of their finances.
You can't just buy every publicly-traded stock though: for one thing, that would massively incentivize obvious scammers to do the bare minimum to get their stocks included, and drag the index down. Avoiding companies that are illiquid, non-transparent, or lacking in a clear track record is important. The SpaceX IPO bears more than a passing resemblance to a pump-and-dump scheme:
1. SpaceX's line of business* is tremendously unclear.
2. SpaceX doesn't actually need external capital to fund its operations.
3. SpaceX is floating only a tiny fraction of its putative market capitalization.
4. The main purpose of the IPO appears to be to allow insiders to cash out.
5. The way the lion's share of the IPO gets sold is if large index funds and pension-holding companies demand shares, and that only happens with the index-inclusion exceptions we're discussing here.
So, we agree that these "mega cap IPO" companies won't be profitable in the next 5 years. That's a huge period of time. How can public markets accurately value a company that isn't expected to be profitable for such a long period of time; there are so many things that could change their trajectory towards profitability, all the more so if we accept your premise that these companies are "civilization changing."
My conclusion is that it's perfectly fine, even beneficial, for indices like S&P 500 to avoid any special treatment for these companies. If SpaceX is clearly profitable 5 years from now, and has reached 50% free-float, that seems like a good time to start including it in the index.
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* Nearly all of its revenue comes from launching satellites and running a satellite-based communications network, but much of its putative valuation comes from a hastily glommed-in also-ran AI company, and its association with a person who is famous for running other businesses and for political connections.
If they're doomed, they're bad companies. This isn't complicated. You can run a fraud and double down real aggressively and as long as you're not called on your bullshit you look incredibly good, until you don't.
If they're doomed, they're bad companies. You can make the argument they're not doomed, but that's a separate argument.