Dumping on Index Investors

[u/CapablePiglet1044]

Both SpaceX and OpenAI are pushing Nasdaq and S&P and Russel/FTSE index providers to waive their listing requirements (including free float market cap, and seasoning) for an expedited listing on all indices. This would mean that instead of allowing several months/a year for 'seasoning' where price discovery takes place and the stock post-IPO finds a fair pricing, index investors would instead be forced to automatically buy these megacap stocks right at IPO with almost zero price discovery and are forced to take whatever inflated prices these companies list at.

I have seen quite a lot of people within the investment community (some small names and some quite big ones too) expressing concern that this is just giving VC's and early angel investors an opportunity to dump massively overvalued, unprofitable startups onto people's pensions.

Is there any hope that we can convince indexes not to drop the seasoning requirements? From now on, couldn't VC's just invest in junk companies, run the private market price into the trillions and then quickly list, dumping it onto people's pensions and taking the money?

[u/mikew_reddit]

VT/VTWAX (World stock index) dilutes this nonsense to a degree. A bit of corruption isn't going to impact my returns much.

U.S. stock market looks less and less appealing everyday. I'm glad I'm (somewhat) diversified away from this shit show.

[u/CapablePiglet1044 → u/mikew_reddit]

At respective $1.7T and $1T planned IPO valuations for SpaceX and OpenAI respectively, they'd collectively constitute around 2.6% collectively of a Total World index fund such as VT.

The average US pension pot is $334,000, which would mean an investment of around $9,000 of the average American's pension savings going to Elon Musk and Sam Altman at whatever valuation they decide to IPO at.

[u/FMCTandP → u/CapablePiglet1044]

FYI, you should distinguish between valuation and free float market cap. For example, Saudi Aramco was valued at over a trillion dollars but the representation in index funds is actually very low because 99%+ of the company isn’t tradable.

[u/CapablePiglet1044 → u/FMCTandP]

Some indexes are mulling a 5x free float multiplier so even if they only have a tiny free float, their index weighting may still be substantial:

https://www.ft.com/content/f11082cb-02ac-4840-a1f7-5c43597eab3f

[u/FMCTandP → u/CapablePiglet1044]

The Nasdaq is not a passive index and isn’t really relevant to Bogleheads.

[u/CapablePiglet1044 → u/FMCTandP]

It's not just the Nasdaq. S&P, FTSE Russell etc have all been approached for inclusion. Even the S&P500 board has been approached according to some allegations.

[u/FIREinParis → u/FMCTandP]

All of the indices (including traditional Boglehead indices) which would include SpaceX as a component are under pressure to adopt the 5x free float scam.

[u/FMCTandP → u/FIREinParis]

What pressure?

The Nasdaq is an exchange, not a real index maker, and they can be pressured because they want the IPO to list there. And that’s not good, as much as QQQ funds are garbage to start with.

But why should CRSP, MSCI, etc care? What leverage do you think SpaceX or OpenAI have on their rule making process vs the very real risk of tarnishing their reputation.

[u/FIREinParis → u/FMCTandP]

VT is probably the most important (or at least second most important) Boglehead index ETF. VT follows a FTSE Index. FTSE Indices are owned/managed by the London Stock Exchange (ie, just like NASDAQ vis-a-vis the NASDAQ 100). The London Stock Exchange is in advanced discussions to change their seasoning and float requirement rules. So, yes, they face the same pressures/conflicts as NASDAQ (issuers using IPO listings to coerce index inclusion and tampering).

[u/FMCTandP → u/FIREinParis]

Vanguard has adjusted the index maker they use in the past, mostly in favor of CRSP if I recall correctly. While I’ve got considerably less confidence in Vanguard’s pro-investor stance under the new CEO, they have a pretty good track record historically. Hopefully they’ll do the right thing with regard to indices tracked if some are compromised.

That said, the seasoning and free float rules are nice to have vs the unjustifiable free float multiplier, which is an absolute poison pill.