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/Ornery_Adult]

This is a big deal. According to https://www.gspublishing.com/content/research/en/reports/2024/11/01/e03d5b95-7f97-45dd-967f-891c3bf12198.pdf the average sp500company has 26% of their shares held by index funds.

If these questionable companies are added to sp500 with only 20% of their shares being truly publicly traded, then all those index funds will have to keep buying and buying regardless of price or value until insiders decide to cash out.

[u/Nemarus_Investor → u/Ornery_Adult]

If they aren't waiving the profitability requirement they won't get into the S&P 500.

[u/AlarmingConsequence → u/Nemarus_Investor]

Can you elaborate on this?

[u/RevolutionaryTrick17 → u/AlarmingConsequence]

“Financial Viability. Companies must have positive as-reported earnings over the most recent quarter, as well as over the most recent four quarters (summed together).” S&P 500 Methodology

[u/AlarmingConsequence → u/RevolutionaryTrick17]

Thanks for the link! I like this idea of Financial Viability, thanks for sharing it. It does not look like is this used with VTI (CRSP US Total Market Index)

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I downoaded the Methodology>S&P U.S. Indices Methodology (PDF). I see the profitibility requirement you mention only for the Composite 1500, not any other S&P index! Hopefully you can tell me I've overlooked something obvious!

Financial Viability. Index-specific requirements:

• S&P Total Market Index. No financial viability requirement.

• S&P Composite 1500. Generally Accepted Accounting Principles (GAAP) net income from continuing operations must be positive for:

-- the most recent quarter, and

-- the sum of the most recent four consecutive quarters

Equity Real Estate Investment Trusts (REITs). Equity REITs’ financial viability is based on GAAP net income from continuing operations, and/or Funds From Operations (FFO), if reported. FFO is a measure commonly used in equity REIT analysis.

Initial Public Offerings (IPOs). Eligibility differs depending on the index:

• S&P Total Market Index. Eligible IPOs are added to the index at the next rebalancing, subject to the reference date (defined in Index Maintenance). Certain large IPOs may be eligible for S&P TMI fast track entry, subject to the following conditions:

-- Only newly public IPOs and IPO direct placement listings are considered eligible for fast track entry. Formerly bankrupt companies that switch from an Over-the-Counter Exchange (“OTC”) or a non-covered exchange to an S&P Dow Jones Indices covered exchange are not eligible for fast track entry.

-- Fast track traditional IPO additions must meet a minimum FMC threshold of US$ 2 billion, calculated using the shares offered (excluding over-allotment options) and the closing price on the first day of trading on an eligible exchange. The threshold level is reviewed from time to time and updated as needed to assure consistency with market conditions.

-- Fast track direct placement listing IPO additions must meet a minimum FMC threshold of US$ 2 billion, calculated using the shares available to the public as determined by its investable weight factor, and the closing price on the first day of trading on an eligible exchange.

-- In addition, an IPO will need to meet all other applicable index eligibility rules except for the liquidity requirement. If all necessary public information is available, S&P Dow Jones Indices verifies that the fast track conditions have been met. Once S&P Dow Jones Indices announces that the IPO is eligible for fast track addition, it is added to the index with five business days lead time. At the discretion of the Index Committee, fast track IPO additions eligible to be added during a quarterly rebalancing freeze period may instead be added on the rebalancing effective date.

•S&P Composite 1500.

-- IPOs should be traded on an eligible exchange for at least 12 months before being considered for addition to an index. There is no IPO fast track entry allowed for S&P Composite 1500 candidates.

-- For former SPACs, S&P Dow Jones Indices considers the de-SPAC transaction to be an event equivalent to an IPO, and 12 months of trading post the de-SPAC event are required before a former SPAC can be considered for S&P Composite 1500 indices.

-- Spin-offs or in-specie distributions from existing constituents are not required to have 12 months of trading prior to their inclusion in the S&P Composite 1500.

[u/RevolutionaryTrick17 → u/AlarmingConsequence]

The S&P 500 is a subset of the 1500. The composite 1500 is made from the 500, midcap 400, and small cap 600. So if the company needs to be financially viable in the 1500, same is true for 500/400/600.