Note that index funds don't hold companies in proportion to their market cap, but in proportion to their free float (shares available to purchase on the market).
Both SpaceX and OpenAI's estimated free float are around 4-5% of their shares at IPO. This means that we really are talking about companies in the sub $100M valuation in term of index fund impact (assuming under $2T for each).
That's true for the S&P but not nasdaq, nasdaq is market cap weighted. There used to be a limit that the available float couldn't go below something like 20%. (This is because 5% float available but 100% market cap would cause a huge supply/demand mismatch). But for spacex they changed the rule so there's no minimum, it's just that below 20% float, companies would be weighted at 5x the float instead of 100% of market cap. If spacex is planning on something like 5% float, it would be weighted around 25% of market cap with only 5% of float available to buy.
But it gets worse because when the lock-up period expires in 180 days after ipo (currently scheduled right before quarterly index rebalancing), it's possible that frees up more than 20% of float and it suddenly has to be weighted at the full 100% of market cap -- triggering additional automatic buying.
It certainly seems like it's set up for our retirement accounts to be the insider's exit liquidity.
> it's possible that frees up more than 20% of float and it suddenly has to be weighted at the full 100% of market cap
In your scenario, that 100% cap would by definition be less than 5x float so it shouldn't trigger any more buying than the lock-up expiration itself did.
Not sure what you mean, can you help me understand?
Do you mean if free float goes from 5% to 100%, and weighting goes from 25% to 100%, it's more "extra supply" than "extra demand"? That's a good point I hadn't considered. I'm not sure the details of the lock-up period though, it might be staggered. So if it goes from 5% float to 50% float, that's 45% of additional shares available to buy, but an addition 75% of the market cap that indices now need to weight to. But it's true this would only happen once (when free float goes from below 20% to above). Then after that the extra supply would be more than the extra demand. Or do I misunderstand?
If free float is 19%, the firm is being weighted at 95% of its market cap, which is 5x the float. If free float is 21%, the firm is weighted at 100%, which is less than 5x the float (that would be 105%). The transition from "5x the float" to "market cap" doesn't increase the weighting any more than the change in float would.
Collectively, Alphabet (Google), Amazon, Microsoft, and Nvidia already own approximately 25 - 35% of OpenAI and Anthropic respectively. They already are a part of your portfolio.
This kind of indirect exposure might look good on paper but it's never even remotely a linear mapping in practice. Holding the underlying directly is the best bet if you want to minimize the possibility of getting screwed over by external factors while maximizing your practical exposure. It really sucks to be right and still get punished for it because Xbox or windows shit the bed last quarter.
Agreed. The mere "mass" of these companies dampen any movement that the underlying asset has. I mean, in a earning call it might just be a line item in the "Others" section. And even if they made/lost billions it is a small % of the quarterly profits of such companies.
Index funds buy companies, for the most part, according to their market capitalisation.
They own more of bigger companies than small.
There's the option of "equal weight" or other strategies but the overwhelming majority is market cap weighted.
Index funds are also really, really big now and contain a lot of money earmarked for retirement/pensions.
In theory if you had a temporarily very frothy market into which you could sell a part of your unprofitable company to some people at a very high valuation, index funds would then mechanically move in and need to purchase and add significant support for insiders to sell into.
In this case, Elon has moved the wildly unprofitable XAI into SpaceX. SpaceX will IPO with a trillion dollar valuation, while only releasing a small number of shares for public trading.
Due to the high valuation, index funds are required to buy SpaceX stock, which Elon will presumably slowly sell them in order not to crash the stock. The funds will be left holding the stock, while eventually the price will crash, because the company will simply not make enough money to justify the valuation.
> Elon will presumably slowly sell them in order not to crash the stock. The funds will be left holding the stock, while eventually the price will crash, because the company will simply not make enough money to justify the valuation.
Musk owns about 50% of SpaceX. You are saying he is planning to sell the vast majority of that holding at a gradual pace that will not be noticed by anyone but fast enough to get a high price?
I'm sure there are multiple ways to profit from the situation. Even having just a small fraction of the shares publicly traded, while the index funds keep the price high is a huge win for him, as his net worth will be extreme on paper.
Ok, but how does this "hold the bag for the oligarchs"? And which specific oligarchs do you have in mind when you say this? Are you thinking of Sam Altman and Dario Amodei and Elon Musk?
Index funds will prop up the valuations of these companies, while they return nothing but value on paper. The owners on the other hand can use the valuation as collateral to loans, which then generates cash for them. Musk and Altman would be the most visible benefactors of this scheme, yes.
All of the mentioned will dump their overhyped and overvalued trash onto retail investors which are forced to buy it due to it being part of the NASDAQ. It will tank in value afterwards due to public scrutiny revealing thr fiscal unprofitability. Retirement funds will be ripped apart, trust in the financial system will evaporate, people will be left holding the bag on a scale that makes Lehman brothers seem like a trial run.
They (everyone) are not forced to buy it. They’re buying it on the hype. Tesla for example is done worldwide aside from the USA, but it still has a cult and hype behind it, if you are a smart early investor, you have already sold all your shares in Tesla and moved on because they will never be as big as they were five years ago. Tesla’s done BYD has seen to that.
Many investors haven’t figured that out yet but they will eventually and they will be the ultimate bag holders once the bubble bursts for Tesla for good.
There are other companies that are remnants of what they were but they still survive on hype. It just takes a long time for them to die. Another example of that is IBM. They are functionally done in the tech world. It just takes a long time to die other companies that fit that mold is Xerox and Kodak still floating at a much lower level, but they are functionally done.
> They (everyone) are not forced to buy it. They’re buying it on the hype.
But they are and that's the key part of the scam. The index funds will have to buy these, since they are so highly valued. Index funds in turn are very popular investment devices used by pension funds, banks, individuals etc.
>They (everyone) are not forced to buy it. They’re buying it on the hype.
I think you may not understand the problem. As noted, unmanaged/passive index funds invest using market capitalization as a metric. And anybody who is invested in these ETFs thus unknowingly buy into these astronomically overhyped companies, and once these company valuations fall (and they will), pension funds/IRAs/401k will be the bagholders.
Afaik, Nasdaq removed the seasoning rules to include it from the start, S&P would usually be only a year after IPO but they are also discussing changes
Absolutely, I moved all my investments to single stocks that I thought would do well that decision the best that I’ve ever made from an investment standpoint, the returns are infinitely better…
What is the problem? If you buys a SP500 ETF you're effectively buying 500 stocks. You don't need that much, but if that is your wish it is still better than using ETFs.
Sure, if you want to print a 1000 page supplement and staple it to your taxes.
More seriously, I would still worry about order execution and transaction costs. You are likely to end up on the wrong side of the bid/ask spread when playing against the big boys.
If you're actually serious about this, you might as well start your own ETF. Or just buy this one I found after a quick Google: https://www.proshares.com/our-etfs/strategic/spxt Buying multiple sector-specific ETFs is another approach. I'm told that utilities are good to hold during a downturn.
In some countries (like Switzerland) you don't have any capital gain tax __unless_ you are a professional investor. What makes you a professional investor? One of the things that can elevate you to that status is the amount of trades you make.
So I am sure this is not viable for many people as buying an ETF counts like 1 trade, but investing the same money in the underlying assets count like 10s of trades.
Unless you have huge amount of money to play, there is no need to buy dozens of stocks every month. If you already have a portfolio of several stocks, you can buy just one or two every month and increase your portfolio. If you are just starting, you can buy a few more, or decide to start just with the most boring and safe stocks like coca-cola or IBM.
It’s a thing but your order execution won’t be as efficient as an ETF, so you will be losing a non-negligible amount each year in slippage from the large number of small transactions
Unless you're over trading (which is not the goal) you'll pay very little because you're buying and not selling for several years. This will end up being less than the fee you pay to the ETF every year.
> It’s a thing but your order execution won’t be as efficient as an ETF, so you will be losing a non-negligible amount each year in slippage from the large number of small transactions
Not necessarily
ETF managers execute block trades outside the normal market, sometimes through dark pools, not even reported to the public.
Fidelity, Vanguard, etc ask JPMorgan, Goldman to execute these block trades and pay them a fee. This fee can exceed the “slippage” a retail investor can face.
It is very true what they said. In an ETF you get both bad stocks and good. You have no choice.
If you diversify manually you can pick and choose only the crème de la creme
But… people love to be lazy or just aren’t knowledgeable enough to pick their stocks themselves and thus it is safer for them to just stick to broad strokes of an index fund.
For starters as basic portfolio, you could 1:1 an index fund but take out all the garbage from it and keep only the strong, bright future companies.
ETF are just noob introduction to the stock market and great one at that but to maximize returns you want to be more specific and intentional about your picks.
Where etfs are great even after you learn a lot, is exposure to whole sectors of the industry. That’s how I treat them: one - etf - an index of how a particular industry fares.
Source: I basically live solely from investments at 30
If that were true, then one would expect a competitive fund that does just that and that give higher ROI than an S&P 500 index fund (or index ETF) when you consider expense ratio. What is a such a fund? Or, alternatively, can you point us to a comprehensive list of those companies you would exclude from the index to get superior returns?
My returns are around 20 percent per year for years. I lack will and energy to list everything I owned but it’s basically a method of value investing + momentum trading so two opposites. You could say it’s a diversification of investing philosophies.
Honestly it’s a free for all game so no one has any interest to share their secrets and methods. When you lose money I make money. Better player wins.
Buffet was severely handicapped by the amount of money he had available. He mentioned that himself. If he had to manage only a smaller amount of money he would easily achieve 40% or more per year.
I doubt it makes people sad (well not me at least) because the buy in to get Citadel to invest for you is what 10? 50 million?
You could hit up juleiie from above for his/her winning method I suppose, or you put a portion of your savings into an appropriate ETF and get on with your life.
