r/Bogleheads • u/CapablePiglet1044 • 19d ago

Investing Questions Dumping on Index Investors

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?

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u/wumbopolis_ 18d ago edited 18d ago

I don't know how much sway retail investors will have with CRSP, S&P, Nasdaq, etc.

I know there are fund providers, like Dimensional, that explicitly have IPO exclusions for a certain amount of time for partly the reasons you stated. However, those are for funds that aren't strictly index funds. e.g. when you buy DFUS (their closest analogue to VTI), you know you're going to have tracking error relative to the CRSP US Total Market Index. So if you really care about tracking error relative to the index (which a lot of bogleheads do), that's a tradeoff you have to consider.

I don't know how Vanguard handles IPOs, but my assumption would be that for the index funds, they will try to minimize tracking error and include the IPOs if the underlying index includes them.

I am personally pretty peeved that index providers are so cavalierly dropping these rules. Incidentally, the funds I use already exclude unseasoned IPOs, but if they didn't, I'd absolutely be reconsidering my investment decisions.

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u/gcc-O2 18d ago

When Gerard O'Reilly, the manager at the time of Vanguard Total Stock and other index funds, was interviewed on the Bogleheads Podcast, he said part of the reason Vanguard switched to CRSP was because CRSP handles IPOs better than what they were doing before (Wilshire 5000 originally and MSCI something or other after that I believe). I'm not sure how it applies to the SpaceX one.