30
votes
Nasdaq rewrites its index inclusion rules ahead of SpaceX IPO
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- Title
- SpaceX IPO Is Forcing Changes To Index And Underwriting Rules
- Authors
- Garth Friesen
- Word count
- 1093 words
One of the reasons I'm not a fan of passive investing. Passive investing only works under the assumption that there are enough active investors out there properly pricing in information and applying rational analysis to the market. If enough people are passively investing, then you'll lose a lot of rational price discovery. Some will say that this is naturally self-correcting, since active investors will always be able to profit off irrational valuations. But, if the market doesn't correct for longer than you can stay solvent or, in the less extreme case, stay within an acceptable band of performance, then your clients will take their wealth to another fund. Add in post-2008 moral hazard (or as Buffet has called it, the "too big to fail" paradigm), the growth of unsophisticated retail investing, and rational investors trading off expectations of irrationality within the market, it becomes harder to impossible to make sustained bets on truly fundamental rational analysis. And, once the canonical valuation models start to fail or underperform, the game theory starts to really favor trading off of momentum and sentiment over true fundamentals.
SpaceX's plan is to create an absurdly high valuation through a small portion of the market that's highly risk-loving, cynical, and/or irrational, then to stabilize that price through an accelerated entry into the Nasdaq-100.
On a related note, I found this excerpt a little funny:
"Too large to digest" = bullshit valuation.
Other indexes have different rules. Looks like the S&P 500 might have a rule change, though not as extreme:
Elon Musk's SpaceX Could Be Fast-Tracked Into S&P 500 After IPO Under Proposed Rule Changes
So if I understand this, it's basically going to screw passive investors into overpaying for the tesla holdings? The grift is getting pretty brazen.
Having the biggest stock indexes bend their rules to suit you is the biggest red flag.
What purpose does it serve outside of falsely legitimizing its valuation? It's not like stocks outside of those magically disappear.
It'd be like if Enron started lobbying to ban criminal prosecution of executives in 2000.
For the Nasdaq, the company that makes the list is the Nasdaq stock exchange and they benefit if SpaceX lists its stock on their exchange, so they’re doing it to get the business.
For the S&P 500, it’s not just about SpaceX. OpenAI and Anthropic are going to be very large and unprofitable when they go public too. The size of these IPO’s is unprecedented. The stated justification for the S&P 500 is that they want to include all the largest public companies:
https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20260430-1483123/1483123_spdji-us-indices-megacaps-consult-20260430.pdf
Index investing isn’t about what companies are “legitimate.” It’s about having investments in all of them in case they go up.
Tesla was added to the S&P 500 in 2020. This is about SpaceX.
Idk, if you “passively” invest in QQQ you’d probably want this, because you think spacex will moon. QQQ ain’t exactly VOO or VTO.
VTI typo?
There is a strange logic at play, where large cap stocks that are highly overvalued in the medium term benefit both from greater access to borrowing at lower rates and from the "too big to fail" paradigm, which in turn translates to real long-term gain for the company. This isn't something I'd want to support.
What does that have to do with what Nasdaq decides with its own index?
Sure. That’s why you shouldn’t buy QQQ. They put it to vote, QQQ owners voted for it, kinda is what it is at that point. Just get VTI or another total market fund if you don’t want shenanigans.
Ideally, our major financial institutions should care about financial integrity and whether stocks are priced at their true economic value. I care about stocks being properly valued because otherwise it undermines the degree to which ordinary consumers can decide winners and losers in the economy through their consumption and also incentivizes government bailouts of some form or the other down the line when there's an impending correction. Of course, people can vote with their wallets and this discussion is to highlight what Nasdaq is doing.
Ideally they shouldn’t. That’s ideally the point of the market - none of the actors need to be good actors, they can be maximally selfish and yet the equilibrium is that the commodity is priced at its true economic value.
It really doesn’t. QQQ isn’t important enough for that. If SpaceX gets a bailout, it’s because it’s the only reason the US is competitive in the space industry. Before SpaceX our astronauts had to use Russian rockets to get to the ISS. With the war, if SpaceX didn’t exist there would be zero American astronauts in the ISS.
I wouldn’t catastrophize it either. QQQ is the tech hype beast ETF. It’s not like this is the corruption of a boring old index, that’s its identity. If you bought QQQ, you’re really a big believe in high growth tech companies, and you’re okay with its absurd fees.