[zhivota]

Big relief for me. As a passive investor, I want the indices to follow the same passive strategy they always have, and specifically not make exceptions for specific companies like SpaceX wanted.

Plenty of ways to get exposure to that stock without it going into the indices it is not qualified for.

[codegeek]

Agreed. S&P 500 needs to be seriously gatekeeped. We need safer boring companies in there thatbhave been peoven over a long period of time. Nothing against these companies but they are not proven and ready for S&P 500.

[jstummbillig]

Let's say Alphabet shifts further to ~become a 100% AI company in the same way that Anthropic and OpenAI are. Should they be removed from the index? If not, why not?

[fny]

Forget AI. Any company in the S&P could set fire to their entire business in a pivot to Labubus.

A certain amount of required scrutiny and experience derisks that possibility. Also remember pre-IPO the valuation isn't set by the broader market, so you don't know if any of these valuations are even real. Do we want to set a precedent where banks can put any price tag they want on a pig everyone is forced to buy?

Once these companies go through the same process Google or any other S&P member did, they're welcome to join the party.

[thiisguy]

The logic isn’t the same. We’ve had plenty of history to judge Alphabet’s financials. It’s less about AI and more about allowing the market to appropriately price the stock after seeing their filings for a period of time.

[jstummbillig]

The financials will be very different when you start doing something entirely different, with all your might.

[simonh]

This is true, and it's why index trackers exist, in order to diversify risk across the market so an investor is not excessively exposed to that happening for particular stocks. The market then re-prices that stock. As an index fund investor you are outsourcing your discretion to other market participants.

However the market hasn't priced these new stocks at all, the existence of index trackers is being exploited to force prices on enough buyers to make the prices stick. This is the wrong way around. It's market manipulation. It's using the behaviour of index funds to influence prices, decoupling those prices to at least some extent from the discretion of market participants.

Let the market price the stock, then the index trackers can buy in, this is exactly why these rules exist, and why it's a travesty that the NASDAQ is waiving them.

[fouc]

I think it would be reasonable to consider moving a company making large changes like that into some kind of probationary state, and automatically adjust the weights it has in the index as a result.

[jldugger]

The reasons we have Google in the index and not Anthropic are many:

1. Google has a history of profits. Their move into AI isn't coming at the expense of Search Ad revenue, and can be seen as defending it for the future. Their last annual report shows continued growth in this sector. So the P:E ratio isn't NaN.

2. Their stock prices has survived the test of market trading and multiple reporting windows, short sellers, WSB regressive behavior, etc. In part because they have a huge publicly tradeable float.

3. There isn't a huge bundle of shares in lockup until six months after the IPO that would put selling pressure on the symbol.

It's also a safer bet as a company, though that technically shouldn't be the criteria for indexing:

1. Google has a diverse product line: youtube subs, search ads, adwords, cloud services, etc. And a demonstrated ability to launch more (probably too many more).

2. They have a huge existing customer base to upsell to; cost of customer acquisition would be low for quite a while.

3. Anthropic and OpenAI are dependend on nvidia to supply them every beefier chips, while Google has their own TPUs to run on and lease out to others.

[xutopia]

An IPO can be a very volatile moment for any stock. This isn’t about AI so much as it is about an unproven company h th at is actually losing money right now.

[codegeek]

Not the same comparison. Alphabet/Google has a solid 25+ year history. It's not 100% AI or not. It's about a Healthy and proven business model.

[jgilias]

If they then stop fulfilling any of the inclusion criteria (profitability, say), they should be removed, yes. Isn’t that obvious?

[aeternum]

No because profitability is only required to enter not to stay.

[dodu_]

Yes.

I don't want my life savings tightly coupled to a young and hyped up technology which is currently being wielded in the most antisocial way possible.

Simple as.

[isatty]

Alphabet has decades of financials and is the most profitable company in the world.

[opsnooperfax]

Yes.

[dehrmann]

What you're describing is closer to the DJIA.

[sseveran]

Its cool. I will buy. And you will buy in 12 months.

[root-parent]

This thread should be marked as dupe. But ChrisArchitect seems very picky...

Previously: "SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P" - https://news.ycombinator.com/item?id=48405718

[asdfasgasdgasdg]

Well it’s just the S&P. Other big indices may include it eg the Russell 3000. But it’s not quite as big of a deal as it seems because the market cap on which they scale is the float not the whole value of the company.

[zugi]

Thanks for pointing this out!

It seems obvious in retrospect, but the fact that SpaceX will be "valued" at $1.75 trillion after the IPO is irrelevant when only $75 billion worth of its stock will be publicly traded.

$75 billion in float-adjusted market cap puts it around 180-190th in the S&P 500. So sure, it will likely get in there eventually, but there's no rush to bend the rules to get it in right away.

[tananaev]

Wait until you hear about float multiple Nasdaq is doing.

[anonu]

You'll eventually get exposure to it when it gets added in 12 months. Unless there are better profitability criteria. Ultimately it's all about market returns. If other indexes add it and outperform then eventually money will shift to those funds that do better.

[vikramkr]

It's not just about returns, it's also about risk. The role of a passive index fund is to be a passive index fund. If the s&p starts chasing returns, that will reduce its utility to the market. You get higher returns by being compensated for risks that passive investors/retirement funds don't want to take. And active investors use the S&P and similar indexes for the specific risks and asset class exposures they provide. You might think the economy is going to do poorly which would be good news for some company that's anti-correlated with the economy but you need to hedge that bet for if the economy does well, so in addition to buying shares of whatever that company is you buy into some market reflectiong mix of stocks bonds etc. The role of that hedge is to have a counterbalancing asset that moves opposite your primary bet to reduce volatility, and the role of the s&p 500 is to broadly reflect the american large cap publicly traded stock component of the market. If the S&P 500 begins behaving unpredictability to chase returns as an index then buying funds that track that index is no longer doing what you need it to do. S&P index loses utility, active investors just use some other index, but passive investors with 401ks locked in to tracking the s&p are suddenly forced to buy whatever bet the index creator is making en masse driving the stock price up. That's not a good outcome for anyone except the company muscling their way in and anyone that was somehow rewarded by that addition

[jgalt212]

I think it will be longer than 12 months, if ever.

> To join the S&P 500, a company must demonstrate positive GAAP net income in both its most recent quarter and the sum of the trailing four consecutive quarters

[MichaelDickens]

What do you mean "better profitability criteria"? I don't want an index to exclude companies on the basis of profitability. I want it to hold the market.

(I also don't want them to create special exceptions. The S&P 500 has pre-existing inclusion criteria, and I'm glad they're sticking to their rules.)

[lazide]

Every index has criteria, usually somewhat unique, or there would be no marketable difference between them?

[quickthrowman]

> What do you mean "better profitability criteria"? I don't want an index to exclude companies on the basis of profitability. I want it to hold the market.

OK, then put your money in VTI/VTSAX instead of a S&P 500 fund. I own some VTI and also some FXAIX, you can do the same thing and choose which index to buy.

[BeetleB]

> Ultimately it's all about market returns. If other indexes add it and outperform then eventually money will shift to those funds that do better.

That's like saying that if Nvidia performs way better than an index fund, then the index fund will shift to consist only of Nvidia.

In any given year, there are plenty of index funds that outperform the S&P 500. They don't freak out over it.

S&P 500 is volatile over 5 years - I'd argue even over 10 years (see the charts at https://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-i...). The whole point of investing in it is for much longer windows.

So yeah, perhaps after 10 years they'll change once they'll see other index funds doing better, and have data to back up that in the long term, early inclusion didn't hurt.

[groundzeros2015]

You’re assuming their success is a done deal. But there is a large amount of risk in these companies.

Any individual can buy as much as they want.

[marcosdumay]

I don't think they ever got profitable for 4 consecutive quarters, if you count xAi.

Anyway, if other indexes add it, and it fails spectacularly, money will shift to those funds that do better.

[doctorwho42]

I'll take consistency over temporarily high returns that require you to time the market

[8organicbits]

> money will shift to those funds that do better

I'm not disagreeing that people invest this way, but I'd like to point out that past performance does not imply future performance, and that investors should consider factors other than just past returns.

[outside1234]

After 12 months the market will have sorted it out. They can’t fake it with investment banker tricks for that long.

[nimih]

How long was Enron able to fake it, out of curiosity?

[addandsubtract]

Tell that to r/gme

[doctorwho42]

More like tell that to /r/tesla

[jaylittle]

More than likely none of these AI companies will exist 12 months from now. Their carcasses will be devoured by entities with enough money to buy up the scraps after the bubble pops and the market implodes.

Neither SpaceX, OpenAI or Anthropic have a future. What's a shame is that had Elon not merged SpaceX with xAI it might've actually had a future - but he had to go and ruin it.

What an idiot.

[AzzieElbab]

The end is near!

[MagicMoonlight]

Yeah but the point is, after 12 months we’ll know the real price. Right now it’s just a ponzi.

[jgalt212]

Same here. I was so upset about the prospect of my index funds / retirement savings being force fed 100X revenues investments in large size that I emailed my Representative and both Senators. And to add to the irony, I used ChatGPT to help me write these letters.

[carlosjobim]

Then move your savings into some other vehicle instead.

[thinkthatover]

If only! Many people have limited options for investing based on their employer's allowed plans that match 401k contributions

[otterley]

They’re usually mutual funds managed by a brokerage or a company like Vanguard. Those funds often will have different management strategies than S&P 500.

[lokar]

If it's not in a tax sheltered account that can generate a large tax bill.

[sahildeepreel]

Russel 1000 will include it in 5 days. Nasdaq in 15 days.

[cmiles74]

It reads like greed and corruption to me.

[root-parent]

"Your 401K Is Their Exit Strategy" - https://news.ycombinator.com/item?id=48433705

[alsetmusic]

When we interviewed a financial planner in 2024, I specifically asked for her take on AI companies. It was a trick question. If she was bullish, we'd have walked. She had a good answer about investing in companies that are established and have stakes in AI companies, such as Microsoft.

I'm greatly relieved that at least one major institution in the markets is showing restraint and exercising caution. I'm also a little surprised at the rationality given what we've seen in the past year or so.

[l23k4]

> I want the indices to follow the same passive strategy they always have

Okay? But the debate has been specifically about getting rid of new rules introduced in recent decades as they're incompatible with the purpose of the indices in the current situation.

[PaulDavisThe1st]

Problem is, most of the other indices have not done what S&P chose for the S&P 500. So if you have money in a NASDAQ, Russell, or FTSE index, you're going to end up with money in SpaceX. Even the S&P Global Index seems likely to include it.

The whole thing is disgusting and the financial sector should be collectively ashamed of themselves.

[tick_tock_tick]

I mean as a passive investor this stuff should terrify you. You're learning that your "passive" is actually quite active. It's why people suggest VTI over VOO/SPY for "true" passive.

If you want to be active then keep your positions but just know and accept the active label.

[sscarduzio]

I agree, but… Plenty? Really?

[flakeoil]

Just buy the stock or buy a mutual fund which invests in IT, AI, Tech what have you. Sooner or later they will probably also be included in the general index funds.

[duttish]

Exactly. Once they have enough float and has had enough time for actual price discovery they'll be included in index funds like any other large cap stock.

[reactordev]

This. This a risk stance where they want to see the performance in 3-6 months. I have no doubt hundreds of funds will buy in but the major index needs to be sure it’s not going to drag down the entire stack with its inclusion.

[BlandDuck]

Exactly. That's what the index funds would have had to do as well.

[prasadjoglekar]

Yes. Plenty is correct. Fidelity let's you buy SpaceX at IPO with only $2K in the bank.

And there are other reasons to be cautious. Many passive funds don't license the SP500 and instead mirror it with their own synthetic index. They are not bound to respect this decision.

[intrasight]

I think caution is most warranted, but I also think it's likely that SpaceX will become a real-life Weyland-Yutani Corporation (i.e. "The Company") of Alien and own space. But I'll be long dead before that plays out.

[throw7]

I've always favoured Tessier-Ashpool S.A. as comparable. The creation of AI's and Freeside and Musk's pronatalism slots in nicely.

[KPGv2]

Musk isn't a natalist. The global population is going up. And yet, he complains about not enough births. Because he is a white supremacist. He wants white people to outnumber other races. The current state of affairs would be satisfactory to him if he were merely a natalist.

[xhkkffbf]

The population is very hard to count, believe it or not. In many places, the birth rate is well under replacement and in the others it's dropping quickly. Furthermore there's widespread fraud and deliberate miscounting which also makes it hard to really know.

[groundzeros2015]

Source?

[dbalatero]

> But I'll be long dead before that plays out.

Given how that's played out in the movies, I'd be happy about that.

[zerobees]

I get what you're saying, but I think there's a contradiction between wanting to be a passive index-fund investor and having opinions like that. The core tenet of index investing is that the market knows better than you.

[aloha2436]

Plenty of active funds also give you roughly market returns, and it's not very difficult to do the same if you're investing for yourself. The important differentiator for index funds is that they have extremely low fees and take up none of your time.

[lokar]

That's simply not true. The core tenet is to buy mechanically according to some rule. Many indexes are not "the whole market".

[outside1234]

The S&P 500 has had these requirements for decades and the approach has worked. This is really a statement that they aren’t going to change what worked so that a few billionaires can manipulate it.

[alsetmusic]

They appear to know more than you, too. They know not to change rules that have protected their investments for a chance to get into a risky bet on the ground floor.

[matwood]

> the same passive strategy they always have

You'll be shocked to know they have changed the inclusion rules a number of times.

I suspect if in 12 months these megacaps are still megacaps, they will revisit the profitability rules. It's hard to have an index with 500 of the largest, most significant companies leaving out companies with trillion dollar market caps.

[steveBK123]

Seasoning and profitability rules are why S&P does not have as steep of a drawdown or as long as a recovery as Nasdaq over the last 30 years of market performance.

The S&P recovered from Dotcom bottom in ~7 years while the Nasdaq-100 took 15 years. Likewise Nasdaq took 3.5 years and the AI hype to recover back to its COVID highs in 2024 while S&P had the same recovery in about 2 years.

This is the downside to Nasdaq having higher returns in tech bull markets.

So the indices have a very different volatility profile by design, we should be happy to have the choice rather than have them all converge to the same product.

[londons_explore]

My personal photography blogging business has a market cap of a trillion dollars too.

I have 1 trillion shares, and I sold 1 to a mate for a dollar.

Total company revenue is like 50 bucks a month and profits are nil.

Can I be in the S&P 500 too?

[matwood]

Anthropic has raised $130B. It's a bit more than selling a share to your mate for $1.

[Matl]

Yes, it's like selling a share to a group of mates who hear from their mates that AI is hot so they want in. Still does nothing for the profit not being there to pay those investors back in any other way than via new investors (ie pension funds).

[dfedbeef]

There should be a word for paying investors with money from other investors

[codechicago277]

Seems structurally sound, kind of like a pyramid.

[kmbfjr]

Is it when X is clearly engaging in creative financial engineering with a goal of maximizing their value.

[MikeNotThePope]

It’s a list of the 500 largest profitable companies. Gotta make some bottom line $$$ to be included. At least that’s how it’s worked in the past.

[matwood]

It also used to require 15 railroads, but the market moved on. They held tight on the profitability requirement with TSLA and missed a huge part of the growth. They may continue to hold the line on that going forward. But, if the AI companies grow their market caps, it's going to be hard to point to the S&P 500 as representing the most significant companies in the US market when trillions in market cap end up no represented.

Of course this all becomes moot if all the companies crash out. I don't think enough people are asking what if these companies don't crash out though.

[tialaramex]

It becomes moot if even some of the companies crash. If you try to say it works if some of them crash because some of them didn't you actually get that XKCD "Nobody has won the US Presidential Election without..." silliness. "OK, the rule should be you have to be profitable OR have an HQ in a city with two vowels in its name".

Did it really used to require that you own "15 railroads" ?

[antasvara]

The commenter is likely referring to the original S&P 90, which mandated a certain number of stocks in different sectors. At the time those numbers were 50 industrials, 20 utilities, and 15 railroads. The breakdown shifted as the economy changed until the 80's when they did away with sector quotas in favor of rules closer to today (basing allocation on market cap).

Regardless, the S&P 500 also excludes a company like Microstrategy (the company that holds Bitcoin) from their index, had excluded Robinhood for a wile due to missing the profit requirements, and so on. It was never "meant" to cover the 500 largest companies by market cap, and has generally resisted pressure to change that.

[matwood]

Thank you for explaining. People talk about the S&P rules like they are written in stone. There's so much emotion around these exact companies and not the structural shifts that may cause the S&P to adjust its rules. For example, for a time they banned dual class share companies, which would have banned Google from entering today (they were grandfathered on). A ban which they reversed 5ish years later.

They have resisted that pressure historically, and remained fairly conservative. But if these companies stay in the 1T+ range, that's an amount of pressure they have not had in the past. You also missed one of the largest exclusions for a time for profit reasons that's also relevant here - TSLA.

[tialaramex]

Oh! That explanation makes a lot more sense, thanks.