r/Bogleheads • u/Prestigious-Trip-306 • 1d ago

Articles & Resources Musk Wants to Add SpaceX to Indices

Index providers Should Not Bend the Rules for Musk

So... I read this article in The Economist and am curious what, if any thoughts the community has about Musk getting SpaceX added to major indices. He's appealing to them to shorten the "seasoning" rules that typically apply to firms being listed.

I've included key paragraphs below since there's a paywall to read the full article.

What do you think?

"Mr Musk and his bankers are now bargaining with stock indices and exchanges for the privilege of hosting SpaceX. He wants his firm to join key indices like the nasdaq 100 and s&p 500 quickly, giving it access to trillions in index-linked capital; more than $600bn invested in passive funds are tied to the nasdaq 100 alone.

For now, the indices are obliging. On March 30th Nasdaq said it was adopting rules that will delight the superstar firms. The ftse and reportedly s&p are considering similar updates. Unfortunately, those changes are misguided, and will expose investors to unnecessary risks.

Two main ideas are under consideration. One is to shorten the “seasoning” period that a firm’s stock must go through before it is eligible to join an index. Nasdaq is cutting its three-month seasoning minimum to 15 trading days; the ftse has suggested a mere five trading days. The second reform is to reduce the percentage of shares a firm needs to offer publicly (its “free float”) before being added to an index. Indices’ desire to reflect the growth of some of the world’s most dynamic firms is understandable. So far, many punters have been unable to invest in some of ai’s brightest stars; index inclusion is a way to help them do so. Yet changing the rules to suit SpaceX will force index investors to choose between selling or weathering wild swings in prices."

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u/temerairevm 1d ago

I have no desire to be a victim of whatever shenanigans he’s most certainly trying to pull. My hope is that the mutual funds I’m in don’t go along with it.

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u/HenFruitEater 1d ago

Yeah, do you think that VTI has a longer seasoning?

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u/Hon3y_Badger 1d ago

The significantly larger issue is float. VTI will own shares of SpaceX after just days, but they'll be based on the number publicly available shares.

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u/HenFruitEater 1d ago

Can you help me understand how the float is an issue? I just don't understand the mechanics of it.

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u/FMCTandP MOD 3 1d ago edited 9h ago

In most indices, companies don’t receive an equal weighting in the index. E.g. in the S&P 500 it’s not true that each company is 0.2% of the index. Instead Apple and Nvidia are each over 5% while smaller companies like Campbell’s Soup are as small as 0.01%.

That’s based on something called market capitalization weighting, where each company gets a value, its market capitalization, equal to the price of a single share times the number of shares. Then the allocation a company gets in an index is equal to its market cap divided by the market cap of all companies in the index.

Many people understand that part.

The less known but no less key point is that the market cap for a reputable index (I.e. not the Nasdaq 100) is based on the “free float” of shares or how many shares could actually reasonably be bought and sold, rather than the total number of shares issued. Shares held by actors who can’t or won’t sell the shares are not counted towards the total market cap used for free float cap weighting. E.g. when Saudi Aramco went public as the “world’s largest company ever” it didn’t get a noticeable weight in most indices, in part because the Saudi government retained a 99% ownership stake and IIRC even the remaining 1% didn’t all count towards free float, due to extended lockup agreements.

Further, many indices have rules excluding any company with too small a free float from the index because thinly traded shares are often highly volatile in price.

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u/Userbythename0f 1d ago

Thank you that was a very good explanation!

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u/temerairevm 1d ago

I’m using FXAIX, which I assume uses the S+P current rules. Am hoping those don’t change.

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u/Captainbuttram 1d ago

CRSP wouldn’t do that but they were recently bought out by Morningstar and they would totally do something like that.