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Comment by matwood | Hacker News Reader

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 years, and they are changing again to deal with later stage companies coming to the market with already huge valuations.

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Yes, Matt Levine said that, but he also argued the other side's point of view, as he regularly does.

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 to track the top 500 largest U.S. large-cap equities.

They have a point (not wanting to invest in overpriced equities), but if you don't like the companies that surface through passive investing then don't be a passive investor. It sounds like these people want active investing instead. If that's your position, just buy actively invested funds, not ruin the benchmark for everyone.

S&P is caught in a bind, because if they add these companies to the index, it would aggravate millions of passive investors.

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.

That ".125% is not much to matter" argument also cuts the other way, against the Matt Levine argument that the S&P is excluding trillion dollar companies and should adjust the rules for them.

Should S&P really adjust the rules for such a small portion of the index?

Yes, because that number increases to 1-2% of the index after the IPO lockup period ends.

There are three IPOs coming this year that meet this criteria.

Then it seems pretty disingenuous to keep arguing it's only 0.125% so it's not a big deal

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.

The reasoning here is backwards, because the rules in their current form exclude all three of the major upcoming IPOs of civilization changing companies (spacex, anthropic, openai). These companies are all large-caps, are currently in the top 20 largest companies in the US, but the S&P 500 index which claims to be a measure of the 500 largest companies in the US will systematically exclude these. Very likely for 3-5 years and more.

How can S&P justify excluding these three companies from an index of large-cap US companies, which when combined together, consist of 5% of the total market capitalization of entire stock market of the United States?

If the rules are not changed, then the S&P 500 will exclude a significant part of the US stock large-cap market, which defeats the entire purpose of it being a benchmark index.

If the S&P 500 was only used as a benchmark as it is originally intended, there will be no debate to adjust the rules to include these companies.

Yet because today there's trillions of dollars tied up to this benchmark, inclusion and exclusion becomes a financial issue.

S&P is under immense political pressure to not adjust their index because asset managers and the general populous don't actually want passive investing.

You're changing the discussion.

I was specifically not discussing whether S&P would be right to change the rules. As I said, there can be good and legitimate reasons for such change; I'm not disputing it.

The point of your previous comment was a critic against individual passive investors, accused of backtracking and betraying their own credo. This is what I was reacting to.

Not wanting to change the rules just because these three companies really really want in before prices settle and before they are profitable is the correct behaviour.

The unjustifiable thing is changing rules for them.

Market pricing will be interesting. People have been complaining about TLSA being over priced for years and now it's 2%+ of the S&P. Are people selling VOO and VTI because of the TSLA allocation? Nope, in fact TSLA has made them all a lot of money.

People were falling over themselves to invest in these AI companies and SpaceX not that long ago. 75B worth of SpaceX now has to get sold to IPO investors to hit the desired valuation. People say a lot (especially on the internet), but when the rubber meets the road we'll see what people do with their money.

The other bind the S&P is caught in is if these AI stocks IPO and then moonshot before they get added. The question will then be is the S&P an antiquated index? How do multiple trillion dollar companies in the market not end up in the S&P 500 sooner? No one thinks of that case because everyone is so sure they are all going to zero.

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