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Comment by nradov | Hacker News Reader

You seem to be confused about how index funds work. Hypothetically even if $SPCX was added to the S&P500, funds that track that index wouldn't be legally required to purchase it at the IPO price. Have you ever even read a fund prospectus or do you believe the uninformed nonsense you read online? The way it actually works is that when a stock is added to an index the index funds gradually build a position using a series of trades over time.

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Mutual funds and ETFs set forth a prospectus that is a legal document binding them by law to comply with how they operate. While an etf is free to create its own index, that is not the way the market works. Vanguard, Fidelity, iShares, BlackRock and the other major players, state in their prospectus what index the ETF will follow - such as the CRSP US Total Market Index to use one example from Vanguard's VTI etf.

That means Vanguard VTI tracks the stocks that are contained in the CRSP US Total Market Index. So, if CRSP adds a new holding to its US Total Market Index, Vanguard VTI is legally bound by its prospectus to add that stock to VTI and to do so in a manner that assures VTI returns track the CRSP US Total Market Index returns as closely as possible (meaning they own every stock CRSP does and in the same proportion that CRSP does).

This is not just a 'good idea'. It is legally binding upon Vanguard by virtue of the VTI prospectus.

The way you don’t actually address the points people make or even seem to understand them, but rather just keep restating what was already said, makes you a pretty good proxy for the exact view I was talking about, so thanks!

It's always disappointing to see that level of aggressive ignorance on HN. You completely missed the point. The fund is legally bound to make a good faith effort to track a target index, not to immediately buy every stock the day it's added to the index.

It would be helpful if you could provide a source supporting your thought that an ETF following a particular index would buy stock in the new company over what you describe as an extended period of time - as opposed to within a short few days.

I spent quite a lot of time before the SpaceX IPO learning how a change in Nasdaq 100 rules regarding adding a new company to its index, would impact ETFs whose prospectus tied them to the Nasdaq 100. The information I reviewed indicated the ETFs would add all of the new purchases immediately (within a matter of days following the addition of a new company to the tracking index).

>aggressive ignorance on HN

That's rich in view of the fact you are the one who is expressing aggressive ignorance. The truth is:

1. An ETF tracking a specific passive index is legally obligated to purchase the shares of a new company added to that index with zero discretion allowed no matter how irrational the pricing might be.

2. Contrary to what you've been spewing about ETFs adding the stock gradually over time, the truth is all ETFs make their full purchases BEFORE the company is actually even added.

Doubt it? Do a quick google search: How soon do ETF's tracking a specific index buy the stock in a new company added to the index they track?

So stop being a jerk with your personal attacks - especially when you don't know what you are talking about.

2. You’re misreading that. They do it before the rebalance date, not before it is added to the index. Rebalances only happen every 3-6 months generally, so they definitely are buying it over a period of time, not all at once, specifically so they don’t move markets.

The aggressive ignorance (not my term, I’ve got a better one) is that multiple times this guy just didn’t even respond to the actual point. See his first response to me where he just restated the thing I was clearly replying to, rather than addressing my actual argument, which is that all those people would’ve ended up with the same amount of SpaceX shars at the same time, even if the rules had not changed. He just restated the argument I had already just rebutted, then he did the same thing in this branch.

It does not matter that SpaceX is in the index sooner. The future in six months or 12 months would look the same in either case.

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