I’ve moved my S&P 500 investments to the Equal Weight index to reduce my exposure to AI. Quite aside from SpaceX, I think the large-cap tech companies are making some uncomfortably large bets on AI and any major upset could cause a domino effect.
But as so many ETFs have a significant stake in large-cap US tech stocks (the top 10 holdings of the iShares MSCI World ETF is entirely comprised US Big Tech, making up 20% of the value of the ETF), I found S&P 500 Equal Weight to be pretty attractive.
As for SpaceX itself? I feel the numbers involved all sound a bit unbelievable to me. I fear that there will be a rug-pull sometime post-IPO, and retail investors (and taxpayers, if the US Government ends up taking a stake, as they have recently indicated they might do for OpenAI) will inevitably be left holding the bag.
> I found S&P 500 Equal Weight to be pretty attractive.
The rebalancing required to maintain equal weights means constantly selling your winners and buying more of your losers. That creates volatility drag. Stock returns are highly skewed: only about 4% of stocks outperform the market, and are responsible for most of its gains. By keeping your allocation to those stocks small through constant rebalancing, you are missing out on a large part of their gains. The vast majority of stocks underperform.
Maintaining the equal weighting also requires constant trading, which generally means higher fees. A market weighted fund, in contrast, naturally maintains its desired balance in response to price movements, without any trading.
Also, the equal weighting ignores the amount of outstanding float for each company. If the fact that NASDAQ has not (historically) been float-adjusted (a common anti-SpaceX talking point) gave you concern, this is even worse, due to the multiple orders of magnitude difference between the largest and smallest companies in the S&P. If enough money enters the equal-weight index, this can spark large amounts of buying in (relatively) small companies that is divorced from their economic performance.
The equal-weight index has outperformed the market-weighted index in some periods (not in recent memory), but with higher volatility (so worse risk-adjusted returns). That outperformance can mostly be explained by factor tilts implicit in the equal weighting (e.g., a higher allocation to mid-cap value stocks).
You would probably be better off with a mix of market-weighted funds explicitly designed to give you the factor tilts and risk exposure you want.
This isn't financial advice, but if they dropped 40-50%, things like consumer staples would go up. In fact, they did this Friday, when everything else melted.
The best defensive stock for those situations is WMT, but you can think of other similar names as you reason through the why. That's where I'd go. There are many ETFs such as VDC (Vanguard Consumer Staples).
If you don't want to be so defensive, you could go VTV which is basically "large cap value stocks" so it still includes some Tech like Intel but it's way more diversified into other industries.
Gold is more inflation-related, so I wouldn't go there, at least not for the 40-50% draw down scenario you're describing.
I think a tricky thing is names like WMT, COST, TJX already have high p/e ratios.
You could usually try utilities or energy but those are also high due to AI buildout & Iran.
I think gold could make a come back since it's beating down a bit this year. Treasuries or just a reasonable hedge with puts against your holdings may be the best bet.
Of course none of this is financial advice & is just open discussion looking for thoughts.
Yeah, that all makes sense, great points. I agree utilities and energy are already high. As usual, the answer is probably that diversifying a bit to get exposure to all of the above is likely the right move, but that depends on one's appetite for risk and personal views on when the downdraft risk materializes
Small cap value did well in the 2000 tech crash and SP600 (small cap) doesn’t have many direct datacenter or AI exposed names compared to large and mid cap indexes. But given the scale of capex across the US they aren’t immune from secondary effects.
I think there are no safe harbor investments at this time. Even gold is unpredictable.
Personally I went 80% world excl US and 20% equal weight S&P500 to hedge against what I think is an AI bubble. But if the market decides to adjust Nvidia's valuation 20% downward next week, I expect there to be ripple effects throughout the economy.
(Like the .com bubble, I think the tech is genuinely transformative and here to stay, but the valuations are just ridiculous.)
I think you're missing the feature of equal-weight index that your parent comment is attracted to—which is a sense that the market generally is out of balance toward AI investment at the moment and that there's a correction coming, which the equal-weight index will have less exposure to.
Your concerns sound valid provided things continue on as they have (I'm not a financial advisor and this is not financial advice) but the commenters above you are specifically worried that it's not going to do that. In which case, the disadvantages you point out of the equal-weight index will be handily outweighed. If an AI bubble popping causes the market-weighted funds to suffer, it doesn't matter that we've avoided trading fees along the way.
Company performance doesnt follow a uniform distribution where each company is as likely to overperform as any other. Selling companies that are run well because their stock went up is a great way to miss out on a lot of money.
I've been doing research on this subject for an article I'm writing, and the only way things end well if the government gets involved is if we pass legislation deprivatizing AI data centers. Like the dark fiber laid during the dotcom, the compute is the valuable thing here that will remain after the speculative bubble has burst. The deal isn't bad for the AI companies, they can depreciate on a short schedule while still getting a payout for the capex, and being able to offer tech companies compute subsidies puts the people in a stronger position than if we're subsidizing them directly.
How about because they used tax payer money to help fund them? Why should my money make AI executives & shareholders richer? And let them own the products of my tax?
The administration is funding the data centers are they not? Maybe I got bamboozled into believing fake news, let me check that real quick.
Ok couldn't find that tax payer money went specifically to it, so taking that back.
On the other hand, incentives, of other forms, and rates and agreements with the data centers that mean I pay more myself for my own electricity (happening in VA where I live) is an indirection form of taxation or I'll say still means my own need to work greater (to pay for the higher electricity) is whats supporting that data center. Or said in another way, their presence has led to a greater burden on me and others, and they haven't contributed locally in the way that satisfies me or others locally. If ascribe that to a leech/parasite: if a local leech or parasite is in my community, step one to removing it is seizing it. edit: Maybe seizing it can show that removing it isn't needed, as seizing gives a greater level of control over said parasitic entity.
Hope that answered your question better. If not, I can try again in another way.
If you work through the scenarios, we're going to end up enacting heavy protectionism and stimulus on US AI companies to keep the economy from imploding. We could do this with stock in AI companies (like Bernie is pushing), but if the government pays for that stock it becomes a dump target paying out to oligarchs and the AI companies become "too big to fail." If the government owns the data centers, the people profit even if AI underperforms.
First off, there's a fiscal hole that has to come from somewhere. If it doesn't come from AI oligarchs, it's going to come from the rich at large, or the working class. Real talk, if it comes from the working class, we're 100% going to have a revolution, life is getting unsustainable for a large swathe of normal Americans already. If working class folks feel they're getting bent over for oligarchs now, they'll steal and destroy to make the cost up.
Second, these companies have looted America by hiding income in Panama/Ireland/etc when they've earned it on the back of American protection, American consumers, etc. It would be generous of the US government to offer corporate wealth repatriation and a token payment as part of deprivatization.
The only substantial effect I've seen of the influencers who were doomsplaining this decision was some minor churn in retirement assets from low-cost S&P 500 followers to higher-cost funds. (The market, broadly, never priced in a rebalancing of the S&P 500. So this was almost entirely whipped up by influencers.)
Broadly speaking, if you were actually considering trading on the back of S&P's decision, or worse, if you actually did, consider trimming who you follow for financial advice.
The market may not have ever priced in a rebalancing of the S&P 500, but the S&P 500 also has never allowed entry of companies that may never become profitable.
> the S&P 500 also has never allowed entry of companies that may never become profitable
Yup. Which is why it was always a long shot. I personally thought they'd adopt some of the seasoning rules, but they were more conservative than even that.
> but the S&P 500 also has never allowed entry of companies that may never become profitable
I suspect this will be revisited if all these companies are still 1T+ market cap 12 months from now. At some point the S&P will have to say the market itself has spoken and likely capitulate.
They can certainly say they no longer track the 500 leading large-cap companies on the US exchanges.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
> if you had seen it what would have that pricing looked like?
Look up rebalancing trades, or, less graciously, rebalancing front running. If the index is going to rebalance to include a new entrant, you'll see the other components trade down in anticipation. It's a very tight signal, and it wasn't present to any measurable degree for the S&P 500.
> What does “other components trade down in anticipation” mean when SPCX doesn’t even exist?
Let's model an equal-weighted index with nine components, with each thus representing 1/9th of the index's allocation.
You learn that a tenth member is going to be added. You don't know who it is. But you know that each of those nine will, after that member is included, represent 1/10th of the index's allocation versus the 1/9th they did before. You know a precise bucket of trades everyone following the index is going to mechanically enter into. Which means it behooves you to be on the other side of it.
When rebalancing–or new inclusion–occurs, you see this pre-trading. Similar to merger arb. But much more clear as a signal because you see it in precise ratios across the index's members. It's difficult to pick up for small indices. But for something like the S&P 500, you'd expect to see someone selling those shares in anticipation, and, now that the rule isn't going into effect, someone dumping those shares in those ratios.
You say you didn’t see it happening and I’m asking what would you have seen if you had seen it. What would have been different? Where would have you seen this pretrading that you didn’t see? Who is that someone that would have been selling those shares but didn’t?
> I was planning to move to an equal weight index but this gives me a little more time to evaluate options.
S&P requires 4 consecutive profitable quarters, amongst other requirements, so if one of the new mega caps like SpaceX or Anthropic or OpenAI get included, you’d probably want to get the benefit of their performance.
Put differently, if one previously specifically picked an index fund that is not equal weighted, why would you change from that strategy?
Many people already have x% of their portfolio allocated to a growth fund, that might include fast growing AI companies. You need to keep the risk profile consistent. If you change the rules you mess up people's strategy.
Yeah if people wanted to change their risk profile they would, they wouldn't want their low risk investments to suddenly be high risk. That would suck and mean disaster if that person is heavily allocated to low risk near retirement time.
But they haven't been good performers, and don't deserve joining s&p, and that is the point, do not make exceptions just because Elon Musk or whatever delusional billionaire says so.
Why is that relevant? The rules are in place for a reason, why does it matter what the percentage is? They're not profitable. When they prove they're worth the dollars, they can be included, per the rules.
Also, S&P500 has a current market cap of $67 trillion, 0.3% of that is some $200billion. That is essentially a wealth transfer to the rich. They don't need it.
#2 is _much_ closer to #1 than #3 (let alone #4), meaning that had an exemption been made to allow SpaceX in, given the rest of the existing rules, at least the impact to ETF holders would not be outblown. The same could not be said for NASDAQ , which was the main source of all the debate.
Yeah, the thing that really concerns me about the other indices is the minimum free float in calculations, so not only will SpaceX appear in the index way too early, they'll be artificially giving it a massive boost, meaning that passive fund investors are forced to buy even more. That is the most egregious part of all.
I can partly see the rationale - existing stockholders will want to ditch their stock ASAP to cash in on the artificially elevated prices, and so there's a good chance the free float will increase quicker than the index can capture it, but this rule change will be driving those sales. It's all a scam.
I'm glad a good chunk of my US holdings are in S&P tracked ETFs because they won't include SpaceX until it's ready, but another 25% of my funds are in funds tracking FTSE global indices (so equivalent to about another 15% in US), and I haven't yet found a good alternative to those. I might end up having to switch to separate UK, S&P 500 and global ex-US, but making that switch would probably cost me as much as just sucking it up and being forced to buy SpaceX.
> #2 is _much_ closer to #1 than #3 (let alone #4)
Even with linear scaling, being one third of the way between two numbers is not what I would call underlined-much closer. But zero punches above its weight here. Those extra orders of magnitude should make some impact on the scale.
> The rules are in place for a reason, why does it matter what the percentage is? They're not profitable. When they prove they're worth the dollars, they can be included, per the rules.
I'm sure you know this, but the rules have been changed many times over the years. Now that companies IPO much later with huge market caps, I suspect we'll see more rule changes over time. The S&P 500 is fairly conservative, so they held tight this time. If these companies are still 1T+ 12 months from now, there will be a very strong argument that the market has decided these companies are important regardless of current profitability, and the S&P will likely have to revisit.
> That is essentially a wealth transfer to the rich. They don't need it.
These are not valid arguments. The companies that get added to the S&P are always owned in some fraction by rich people.
SpaceX is obviously majorly owned by Elon, but it’s also owned by regular employees, a bunch of private investors and other funds that regular people invest in.
> They're not profitable.
Right
> When they prove they're worth the dollars,
Profitable isn’t related to “worth the dollars”. You need to look at income and how much is being reinvested into growth. Amazon famously remained unprofitable due to reinvestment and waiting for them to become profitable before investing was a bad bet.
> Profitable isn’t related to “worth the dollars”. You need to look at income and how much is being reinvested into growth. Amazon famously remained unprofitable due to reinvestment and waiting for them to become profitable before investing was a bad bet.
Amazon met profitability requirements and went into the SP500 at around $2.40 in November 2005. Two years before it was $2.70. Six Years before it was $4.40.
Two years _after_ listing it was $4.50. Six years after it was ~$10.
Waiting for profitability seems like it was a good bet.
Mostly owned by Elon who has 84% of the voting rights. Completely his entity and it can’t be denied that the value of an interesting space business has been massively inflated by tacking a worthless AI business onto it.
> "Amazon famously remained unprofitable due to reinvestment and waiting for them to become profitable before investing was a bad bet."
Amazon wasn't profitable because it reinvested earnings into growth, while SpaceX is funding it's growth by taking on very significant levels of debt (which will take a big chunk of future earnings just to service). These aren't comparable from a risk perspective.
TBF, it was obvious for Uber too, but when that one decided to cash on the results of the growth, there wasn't much they could take. So it's not a certain thing by any means.
But anyway, it's also clear SpaceX isn't doing the same as Amazon.
> Profitable isn’t related to “worth the dollars”. You need to look at income and how much is being reinvested into growth. Amazon famously remained unprofitable due to reinvestment and waiting for them to become profitable before investing was a bad bet.
Sure, but we the only thing we know about the company is the current S1 filing. Need to time to see what all of that looks like. Fast tracking it and essentially forcing other people to buy without scrutinizing is the problem. They may very well be worth the money they claim, but we won't know until after they've proven it. That's what the rules are there for.
So is spacex growing like Amazon was? There is no evidence of growth. And no, Google renting them infra grom then is not growth. If it waa, AllBirds is the next unicorn
SpaceX isn't what it once was, but its Starlink division has grown from 50k users to 12 million in 5 just years.
We don't have good public numbers, but that should be over $13B in revenue and about $2B of income over the last 12 months. Given the growth trend of that 5 years, that approx. $2B of income is likely to double by the end of this year.
Add to that the space launch business around Falcon 9, which had 40+ commercial launches that generated about $4B revenue and something close to $3B of income, and SpaceX was looking strong.
Again, SpaceX isn't what it was 6 months ago, before all the xAI fuckery, but the core business, Starlink and space launch, are doing well by themselves.
There is plenty of evidence of growth. The problem is SpaceX as it is is a conglomerate recently cobbled together, and so estimating what it is and what it's going to do is challenging.
> SpaceX is obviously majorly owned by Elon, but it’s also owned by regular employees, a bunch of private investors and other funds that regular people invest in.
Is it really owned by them if Elon retains most of the voting rights anyway?
Effectively it is solely owned by Elon and other people have an equity stake. This is another huge risk. You have to trust Elon not to get distracted and decide to hard pivot to something else.
Look at Tesla and their hard pivot to humanoid robots. He is all in on robots which about a dozen other companies already make and are largely unprofitable in making. He is betting AI rapidly improves in a way that allows robots to become rapidly more useful and there is zero evidence that is feasible in the next 5 - 10 years.
I am not sure if Texas law on the subject is well defined. The SpaceX materials make it clear their position on minority rights is "you have the right to trust Elon or not buy the stock"
> They weight by free float so it would been something like 0.3%. Hardly the end of the world
That's one way to look at it. At a personal level, it's a small sliver and if it were to drop, its influence on your balance isn't much. So that's true.
Another way to look at it is that with ~200 million people owning index funds, all their funds balances together, even a tiny fraction of a percent is a massive amount of money being force-fed into spacex, which is to say, mostly into Elon's pocket (since he owns vast majority of the shares).
So why is it fair to change the rules to give this massive wealth transfer to Musk, who certainly does not need the extra money?
0.3% for SpaceX, 0.3% for Sam Altman’s OpenAI garbage, 0.3% for Anthropic, 0.3% for whatever Elon’s next scam is, and … pretty soon you are talking about big numbers.
But as so many ETFs have a significant stake in large-cap US tech stocks (the top 10 holdings of the iShares MSCI World ETF is entirely comprised US Big Tech, making up 20% of the value of the ETF), I found S&P 500 Equal Weight to be pretty attractive.
As for SpaceX itself? I feel the numbers involved all sound a bit unbelievable to me. I fear that there will be a rug-pull sometime post-IPO, and retail investors (and taxpayers, if the US Government ends up taking a stake, as they have recently indicated they might do for OpenAI) will inevitably be left holding the bag.