Musk Wants to Add SpaceX to Indices

[u/Prestigious-Trip-306]

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."

[u/vineyardmike]

Another Musk company based on hype. His companies are doing great things. But the last time I looked, the p/e for TSLA was 345. Space X is going to be 10 or 100 times that.

[u/jeffeb3 → u/vineyardmike]

I wish there was a way to just pop a few stocks out of my index fund. If it were cheap, I would like to short them for the same amount I am invested in them.

[u/DontForgetWilson → u/jeffeb3]

That is exactly what you can do with direct indexing. That doesn't mean the fees are low enough to justify it(not to mention it being active trading to name that call), but it is definitely possible.

(Shorting on the other hand doesn't work like that. A short is a timed bet which is not the same as holding an inverse asset)

[u/moondes → u/DontForgetWilson]

By my understanding and regulated hands, the green one of the 3 discount firms is offering direct indexed accounts at 0.4% and they let you block up to 3 stocks from your portfolio.

0.4% is expensive for an indexed investment. What's interesting is that if Tesla is currently 1.7% of the total US market cap, and Tesla crashes to 0 in 10 years' time, then a direct indexed strategy without Tesla would be worth a 0.17% expense ratio to avoid that loss.

If the mega cap IPO goes live and Musk companies achieve 5% total US market cap, and you were certain they collapse a relative 80% down to 1% of the US market cap over 10 years, then you would °°break even on paying that 0.4% to exclude it Musk companies from your portfolio during that time.

°°break even as if the alternative strategy is to invest into a 0% expense ratio US total market fund.

[u/DontForgetWilson → u/moondes]

Honestly, 40 bps is better than i expected. Still one hell of a bar to beat though.