Suppose you had a index of 100 companys each with a market cap of 1 G$ for a total of 100 G$.
You have passive investors owning 20 G$ of that index, amounting to 20% of the total, 20% of each company, and 200 M$ per company.
You then rotate out a company for a new one also worth 1 G$. The index is still 100 G$, but to match the index you are contractually required to sell your 20% ownership of the old company and are contractually required to buy 20% ownership of the new company.
However, the newly added company only released 5% of its shares to the public and the founder kept hold of the remaining 95%. Those fund managers are contractually obligated to buy 20% of the newly added company, but only 5% is available. Like a short squeeze, where the squeezer buys and holds supply so there are not enough purchasable shares to cover the shorts (obligated ownership), this is a financial divide by zero.
To get the remaining 15%, which they are contractually obligated to acquire, they must purchase from the founder. As they are in violation of their contract if they fail to acquire the remaining 15%, the founder now has complete control to dictate any price they want.
That is the scheme described: how to short squeeze retirement funds who do not even have shorts for fun and profit.
First: 5x5 is 25, not 20. So it's 25% rather than 20%
Second: they only have to buy the 25% of the listed shares.
To take your 1 Trillion example: if SpaceX has a total market cap of 1T, but only 500b get listed on NASDAQ, and the free float is 5%, the index will weigh SpaceX at 25% of the listed shares, which means it will be weighted at 500 * 0.25 = 125b.
And also note that index ETFs have tracking errors all the time (that's why arbitrage traders still have business!), and the ETFs themselves could also track the performance of SpaceX via derivatives instead of buying the stock. And I think, there are many investors of SpaceX who would like to sell some shares. Fund managers won't have an issue finding their phone numbers.
Also, I would be a lot more pessimistic of the index tracking fund managers’ ability or willingness to find extra shares: their goal is to match the index, not beat it. If the index includes the new firm at a blown-up price because everyone sent their buy orders at the same closing auction, then all the index-tracking funds still track their underlying index. They do not care that after that closing auction, the price of the new firm—and likely the index itself—is going to drop.
But the real scenario is going to be different in two ways: Market capitalization of the new company will only be a small fraction of the index total, even after it's been inflated as indicated. And not all investors in companies on the index are index funds, which brings down the number shares needed to align a fund.
Maybe they propose the rule change because it adjusts for some other problematic effect of the existing index rules? The discontinuity might seem acceptable because it is unlikely to be reached according to their simulations.
Yes, when SpaceX gets added to the index, it's going to skyrocket for just that reason. The other reason why SpaceX stock is going to skyrocket is because of the "infinite potential". After all, Elon is going to be God-Emperor of Mars, and how much is a piece of that worth?
The OP knows this and wants a window to profit from this squeeze. For the general public index owners, the sooner it's added to the index the better, minimizing the time that traders can front run this squeeze ahead of them.
Perhaps better it's not added to the indices at all, but as long as it's inevitable, the sooner the better.
Being added to the index is literally the only thing causing "the squeeze" according to this description though so how does that benefit either the author or the index holder?
If the stock was added to the index at a normal period then all the shares would be available.
Mars is a thin cover story to get the engineers to feed the War machine. "National security" / nuclear threat is a great excuse to get politicians to sell out the country.
> To get the remaining 15%, which they are contractually obligated to acquire, they must purchase from the founder. As they are in violation of their contract if they fail to acquire the remaining 15%, the founder now has complete control to dictate any price they want.
I can't imagine "any price they want" is quite right here. At the very least, shouldn't we expect underwriters and other stakeholders (in this case Nasdaq, Inc.) to negotiate option-contracts as part of the IPO deal to cover their future obligations?
Yes, it might be a "worse" deal than those initial 5% - though we don't even know that - but then institutional investors time horizons are typically much longer than 6 months. Unless you think SpaceX goes straight down to 0, it seems like a risky but calculated, long-term investment.
I agree they could be more transparent about it, but maybe they will send out a notice in the prospectus update?
Index funds and ETFs also have strict replication rules limiting the amount of non-physical replication in their legally binding prospectus...
The more physical a tracker is, the lower the tracking error, but also the more fees you have to pay. "Good" ETFs/IFs are often 98% physical. This makes for higher fees, but more safety for subscribers in case of large swings.
So it's not like they are _free_ to replicate however they see fit, the replication mechanism is part of the product.
It means holding the actual stocks in the underlying index, as opposed to synthetic replication, which aims to achieve returns matching the index via derivatives or other techniques.
It's physical in the sense that literal means not literal nowadays.
>That is the scheme described: how to short squeeze retirement funds who do not even have shorts for fun and profit.
How many retirement funds use the nadasq 100 as the benchmark? The only thing that's really objectionable is the 5x multiplier, and so far as I can tell that's confined to the nasdaq 100 index. If the funds use a sane index without such shenanigans, it won't be affected nearly as much, and the whole debate just turns into the perennial question on whether [company] is overvalued and whether passive investors are being taken for a ride.
Most indexes will be affected. Two of the most common indices - the S&P500 and DJIA - are cross-exchange and include Nasdaq stocks. The biggest market cap companies on the market (MAG7) are all on the Nasdaq exchange and comprise about 35% of the S&P.
Is this grey cause it's wrong? They are all on Nasdaq; and also around 35% of S&P. What am I missing? Is it that the "Most indexes" part is wrong (cause there are more than a few thousand ETF)?
Nasdaq, Inc. is a company with a stock market ("the NASDAQ") and an index "Nasdaq 100"). They want SpaceX to be listed on their market, because they like having more things on their market for all the usual reasons. They are, apparently, offering to manipulate their index to win the listing.
Accordingly, anything that uses or tracks this particular index (Nasdaq 100), such as the QQQ fund, will potentially have to pay for this manipulation.
Anybody not holding or indexing to the Nasdaq 100 index contents will not particularly care and will not really gain or lose any more money than on an ordinary trading day. In particular, this will have zero effect on stocks that merely trade on the NASDAQ exchange.
Indexing to the Nasdaq 100 is pretty uncommon, outside of QQQ, so most people will not care.
What?! This absolutely affects more than Nasdaq 100 / QQQ.
The index is just a function of the stocks. It only moves if the underlying stocks move. Rebalancing Nasdaq will cause selling in the 100 companies that aren’t SpaceX. And those stocks are held elsewhere too…
The Nasdaq 100 shares 79/100 stocks with the S&P. So if those stocks move (probably down because they’re being sold so SpaceX can get bought) pretty sure that's gonna affect anyone exposed to those companies. Whether that’s directly or through other index ETFs. Many of which have a huge concentration in Mag7 right now, for example.
What you're saying is 100% correct, I fail to see how people are not aware of it.
We're talking about a $1.75 trillion (as per the article) company that is about to enter (a part) of the most important capital market in the world at a distorted price, of course that the market as a whole is going to become distorted, money and capital (and the accompanying money and capital signals) are one of the most "liquid" things in a modern economy (if not the most liquid), once you start putting a wrong price tag on them then those accompanying money and capital signals will for sure start doing their thing, imo that was one of the main lessons we should have taken from what happened back in 2008-2009.
I don’t see that in the article. The only thing I see is about S&P is where they mention that the S&P 500’s rules would prevent this manipulation if SpaceX were added to that index. But that’s not being proposed.
> To get the remaining 15%, which they are contractually obligated to acquire, they must purchase from the founder. As they are in violation of their contract if they fail to acquire the remaining 15%, the founder now has complete control to dictate any price they want.
This is not correct and I'm surprised this comment is upvoted to the top. The float is the float, nobody goes to buy shares that aren't available in the float.
I have an index fund for NASDAQ with my broker. When I bought into the fund, the broker promised me that with my money, they will buy shares in companies traded on that exchange according to the specific formula that SpaceX is manipulating here. My broker is obligated to buy. They could open a new fund that has a contact like "we'll keep doing what we had been doing except for the whole SpaceX thing" but they would need my permission to move the money. And I'm only in this fund because it was recommended by my 401k provider -- I don't know anything about any of this. That's the messed up thing here -- the people being screwed are not sophisticated investors, it's nurses and school teachers who hope to retire.
Yeah basically this. These shenanigans water down the value of QQQ. The bottom line is if you don't like QQQ, then dont buy it. Buy the stocks separately or a different index. But for people who don't pay attention, or for people whose 401k's limit their investment options, it is difficult / impossible to avoid the shenanigans
and that's why sector specific indexes are not "good" - only broad market (heck, even global) indexes are worth passive investing for.
A nasdaq index is no different from any other thematic index (like an oil index, or a robotics index). Thematic indexes tend to fail the investor in the long term for capturing beta. But because of lack of knowledge of the _actual_ academic research by retail investors, a lot of clever marketeers sell the idea of a thematic index as tho it is similar to a broad market index ("safety" and diversification).
Some funds promise to track the Nasdaq. I guess the idea is they can't sorta track it and they can't artificially track it through some financial proxy. They have to own real shares?
I’m trying to understand the mechanics here. I get that SpaceX and Nasdaq are in cahoots to get SpaceX bundled with a bunch of other stocks (and that bundle is called QQQ?)
But why must retail investors hold this bundle? If I’m holding now, I can sell it and buy a different bundle right? And if I’m not holding it now, I can just continue not to buy it after SpaceX gets included.
There's trillions of dollars sitting in indexes that are quite literally 'passively' invested. Virtually everything holds this bundle in one way or another. Passive indexing has both outperformed and overtaken active investing - leading a lot of money into VOO/VTI/QQQ/etc that track the S&P500 or some other index ("the market"). For retirement funds like 401ks, retail contributes money every paycheck that gets routed into these indexes. There may not even be much of a choice - your 'plan' may only let you pick some kind of "Target Date Fund" and then the institution picks what it goes into, usually indexes.
If you fully actively managed your own money and picked mostly individual stocks (not broad indexes) then yeah you could change your allocations. But there's a lot of money already in.
QQQ is problematic because it’s influenced by strange back room dealings with Space X, if the article is to be believed.
VTI is different. It literally tracks all public stocks, weighted by market cap so no such manipulation is possible.
If a bunch of people will be forced to buy Space X (QQQ holders), active investors will short the stock in anticipation of market correction and money will flow from those who were forced to buy. I’m sure there are other ways to take advantage of a forced buyer situation.
Total market will be unaffected, assuming efficient market hypothesis / no arbitrage.
QQQ is not in isolation. It’s just a bundle of stocks. Rebalancing that will affect the prices of its constituent stocks, which include some of the highest market cap stocks. Those same stocks are also in many of those other popular market-cap weighted indexes (VTI, VOO, SPY, etc). Price action originating from Nasdaq 100 rebalancing would affect everywhere else those stocks are held. Which is a lot of places.
Except those other indexes won’t have SpaceX. Suggesting any index price moves would be … asymmetric at best.
Now it’s being reported that they’re angling to get SpaceX in the S&P 500 index as well [1]. Maybe if all the indexes get it then it balances out everywhere, who knows. This whole event would be in beyond unprecedented territory.
Yes, you can sell and buy a different index. However, those who buy ETFs want broad market exposure without picking stocks (or ETFs). Also selling and re-buying means you have to pay taxes now - depending on jurisdiction, that is way worse than holding till you are retired and then selling.
SpaceX/Nasdaq want to distort the rules to make more money off the backs of those passive investors.
Bingo. No sane investor holds QQQ because there is no academic theory behind why it should exist. Why is a stock better if it's listed on NASDAQ instead of NYSE? Can any investor answer this question? Doubt it. If you are into factor investing and you like large cap growth, you buy something like VUG. Most people should just stick with SP500 or total market.
However, QQQ had a really good last 15 years and lots of investors hold it because they are chasing returns and because the marketing worked. (The managers of QQQ are legally obligated to spend X% of the fees collected on advertising the ETF, ha ha ha.)
> Why is a stock better if it's listed on NASDAQ instead of NYSE?
The NASDAQ is a stock exchange based in the United States. It’s made up of around 3,500 companies, with a heavy weighting towards companies in the information technology sector.
> If you are into factor investing and you like large cap growth
If you are into factor investing and like large cap tech, you buy something like QQQ.
> No sane investor holds QQQ
The insane can take comfort in their 20% CAGR for the last 10 years on a massive large cap tech expansion.
Does this only affect money invested after June 15th, or does this also devalues money invested before this date?
If you don't invest anymore money in the index during the interim rebalancing period refered to by the author, then one should be alright. Right?
It's really expensive to get all your marbles out, I'd rather not do it if I don't have to.
Right, you are trapped if you are holding QQQ in a taxable account and have substantial gains, so you should do nothing with the shares you already have. But no, ceasing to invest in it will not save you. The rebalancing discussed in the article happens internally with you already invested dollars.
But do take this moment to realize QQQ never made sense to invest in, and put your future dollars somewhere else. There are plenty of funds that overweight large cap tech but track an index that doesn't care which exchange the stock is listed on.
This. If you are invested in a Nasdaq index (e.g. QQQ), it will have to sell some of the tail and buy the necessary weighted percentage of Snake Oil. Apart from you buying snake oil, you will realise some extra capital gains/loses due to the rebalancing.
And to be clear it's not just QQQ; countless retirement target date funds have a Nasdaq component. That's the real target of this grift, your retirement fund.
Tsla is 1.4T market cap, so it's almost like *ELON-stock is going to double in 1 day. It will go from 4% to 8% of qqq in 1 day.
It'll happen a week or a month after IPO date though? It took fb/meta 1 year and then it entered as 1% qqq. TSLA entered 3 years after IPO so probably a small percentage.
Tsla is 2% vti (2T AUM). QQQ is 400B AUM. So add those two and you get $56B of purchasing. This seems like the amount they want to raise via IPO in total in the news, so the banks who do the IPO can sell it all guaranteed.
But people will want to buy it before it gets into the passive funds... So... Post inclusion market cap will be higher than we expect?
Any Canadians in the room should remember this as the exact mechanism by which Nortel Networks became astronomically huge. Any time Nortel got more valuable, index funds tracking the Toronto Stock Exchange (TSE) loaded up on Nortel, amplifying the price increase. This gave the company massive amounts of capital to buy other companies with, which generated more headlines, which brought in more investor capital, which brought more index funds in. In fact, at one point Nortel was so valuable it made the TSE too homogenous to legally index, at least until Nortel lobbied Canada to change the rules regarding diversified index funds.
Spoiler alert for the Bobbybroccoli video, but it turns out this trick doesn't work forever. And when Nortel inevitably crashed it left a good chunk of Canadians as bagholders. And looking at the stock market over the past few years, where basically all the the growth is seven companies, I'm starting to wonder if we're finally seeing America's answer to the Nortel fiasco.
(No, Lucent doesn't count, even though they're literally America's counterpart to Nortel. The key factor that made Nortel a problem was the lack of diversity in the Canadian market. Lucent crashed and burned in a field of hundreds of growing big-cap stocks, Nortel was an extremely big fish in a tiny pond.)
They don't target something else because they wouldn't be an index fund, that's just a passive fund with their own published strategy. Those exist but aren't as popular, the appeal of index funds is that you're just getting "the market" and "the market" is measured by the index. Public indexes are supposed to be lower-cost and less manipulable, but that was before they got large enough to "wag the dog," which is the ultimate point of the article.
The top 3 most popular index fund ETFs track S&P500, which doesn't really pull this kind of shenanigan. Only QQQ tracks the NASDAQ 100 and it's in 5th place by assets under management.
You should probably read a book about index investing if you are going to invest.
Yeah, but the S&P500 is hugely concentrated in MAG7, which are all Nasdaq listed. So when they all get sold to buy SpaceX, you can bet your butt something's gonna happen to a S&P500 ETF.
Yeah, the funnel should be going into the duck's bill of course - is it still so hard to get AI image generators to respect such small but decisive details in your prompt?
TIL that foie gras is made out of duck livers as well, not only geese. Not that I'm more likely to eat any now that I know that, but anyway...
I came here to say this, too. I remember hearing "500M market cap!" and then realizing that was because one person created a new token with 1M coins, bought one themselves for $500, and then started screaming "$500M market cap!" Technically it is true, but it really takes the "greater fool" theory to new heights.
Lmao inclusion after 15 days is going to throw off the waiting curve on index arb desks.
The market usually prepositions a lot of volume pre-add, so much that the add day is usually a non-event. But they usually have a quarter or more to preposition. 15 days is going to cause so much volatility and chaos.
And the funny thing is, the index arb desks can't really opt out of this - you can't arb all names except one in the index.
What a shitshow this would be if the rules pass as presented by Nasdaq.
Also, does Nasdaq think it's worth killing the reputation of their index for the spacex listing? An index is just a list that everyone agrees on following. Losing public trust in this list could mean the end of Nasdaq 100 as a serious contender. There are many alternatives that could easily take its place.
>Also, does Nasdaq think it's worth killing the reputation of their index for the spacex listing?
If I had to guess, they are banking on the meme-factor. Tesla is already seriously overvalued IMO b/c it's the first real meme-stock. Now, they are learning lessons from the FTX-invented low-float meme-tokens in crypto and replicate the model in stocks. The story around SpaceX with it's valid successes makes for a very good meme-stock.
So, they hope that people actually want SpaceX exposure no matter what and do not understand how cancerous those low-flow/high-FDIV launches are.
> The CRSP US Total Market Index, by contrast, adds all IPOs ranging from mega caps to small caps—accounting for 98% of the market—within the first five trading days of the stock’s listing.
So it sounds like SpaceX will show up in VTI sooner than in the Nasdaq100, even with their new "fast entry" rule.
The actual scheme described in the OP requires the multiplier to work, though. Otherwise it's just like any other company that's tightly held, in which case only the free float counts and the scheme unravels.
vti is free float adjusted, so not as susceptible. But:
Elon will naturally do everything in his power to pump his stock, as every CEO does, and VTI buys shares in proportion to how successful that is. That is the nature of passive, market cap weighted investing.
If you want to underweight Elon's companies, or, generally, weight companies based on something besides market cap, you have to get into active or factor investing.
It mostly doesn't matter though, because if and when one stock drops, those investible dollars will likely flow into another stock, so VTI doesn't really care.
Uh, can someone explain this to me like I’m 5, but somehow still have money invested in index funds? It makes me sound like my invested-in-vanguard-total-market-indexes-and-fidelity-target-date-funds money is going to be mechanically dumped into Elon Stock because of FinanceWord FinanceWord FinanceWord gobbledgook FinanceWord but is that the correct reading?
Index funds divvy up money into stocks, in this case weighted by market cap. More market cap = bigger slice of the pie.
SpaceX wants to instantly jump near the top of the pie - capturing tons of the money in index funds for itself, and also therefore taking it away from other companies stocks.
SpaceX (and others like OpenAI, Anthropic)'s private market cap valuation is so high that if they IPO they would instantly jump to the top of the entire stock market. This has never really happened before. By the rules, funds would have to suddenly start buying a huge weight of SpaceX stock - and sell NVDA/AAPL/GOOGL/everything else - to achieve the new balance.
Normally there are rules on how fast a new company can get included in the index. You usually have to be on the market for some time, demonstrate consistently high valuation, etc etc. SpaceX wants to skirt this and jump straight onto the index (near the top).
Further, the rules also usually weight you according to how much of your stock is actually on the market. If you only sell 5% of your company, you only get weighted at 5% of your market cap. SpaceX wants a bonus multiplier so even though they'll only make 5% of their stock available for sale, they want to be weighted in the index as if it was say 15% available. Aka over-bought / boosted price.
This creates both mechanical forced buying and artificially constrained supply. Likely sending the price to the moon, not based on fundamentals but based on gaming the index rules.
Then, once insider lock-up periods are over in a few months, SpaceX can choose to release even more shares - say jumping the available shares from 5% to 100% - which will unleash their full market cap (now even further inflated) and thus capturing even more of the money in index funds.
Index funds being 'passive' guarantees there will be buyers for SpaceX employees and executives to sell their shares to, likely at exorbitantly over-valued prices. At which point they wash their hands of the valuation and your retirement account becomes the new bag holder who has to worry about whether SpaceX is actually worth what you just paid for it.
> Just buy everything you can on day1 and go along for the ride?
What does adding demand to something with a very limited supply do to the price? You won't be subverting anyone's plan here - you're just hoping for a greater fool[1] will buy from you later, if you buy at inflated prices on day 1.
Maybe use your lunch money to buy day 1 and sell just before the lockup period expires? And rebalance your actual retirement accounts into funds that will not get forced into this game.
If you are an index investor, it is probably not worth your time and energy to make any drastic changes because of this particular incident. Space X will comprise a small percentage of the indexes in question, and any impact on your portfolio will likely be imperceptible. And if your holdings are in a taxable account, the tax hit from selling are probably not worth it.
Longer term, folks should be aware that Wall Street has fully caught on to the normalization of index investing and have been looking at ways to use passive investors as exit liquidity. Private equity and private credit are the two recent high profile examples. There was an executive order recently that directed the federal government to consider allowing these asset classes into 401k's. And these sectors have been increasingly making there way into the public markets in various ways (which is ironic considering the name of the asset class). Same story with crypto.
In the past, most passive index investors worried about fees and portfolio composition and diversity. But moving forward it is probably worth thinking about index governance as well. For example the S&P500 has a one year waiting period before an public company can be considered.
Do you have specific recommendations for particularly well-governed indexes? Is something like ESGV insulated from such manipulation? Or is it time for investors to start building their own direct/custom indexing with something like Frec
My recommendation is do not take investing advise from any post on HN. They are notoriously bad about understanding capital markets. There are a few good posters here but they are boring [factual] with 0 replies.
My understanding: It depends on what index the fund is tracking. QQQ tracks the Nasdaq-100 so QQQ is vulnerable. VT tracks the FTSE Global All Cap Index so VT is not directly affected by Nasdaq’s choices but is still exposed to some extent because spacex is likely going to be in the aforementioned FTSE index, Nasdaq’s actions impact spacex’s market cap, and thus Nasdaq’s actions impact spacex’s position in the aforementioned FTSE index which in turn affects VT’s composition (to a smaller extent than QQQ’s).
EDIT: to be clear the above are just examples with two funds (QQQ and VT)
Based on the comment from [1] it seems like the issue with nasdaq is that anyone tracking it is contractually obligated to include spacex? What about for other funds? VIFAX description says
>The Global Equity Index Management team applies disciplined portfolio construction and efficient trading techniques designed to help minimize tracking error and maintain close alignment with benchmark characteristics [of S&P 500].
So given that this only affects NASDAQ i'm guessing they aren't affected? And even if S&p 500 started to play the same games, why can't their supposedly disciplined "Global Equity Index Management team" simply opt not to play along with these shenanigans? Or if they simply do mechanically track the s&p 500, what exactly is the "management fee" paying for?
There’s a lot to address here but in short: VFIAX is an index fund, it tracks the S&P500 index, it’s not actively managed, SpaceX will likely be in the S&P500, so my comment around VT applies to VFIAX (as far as the question of exposure is concerned) but to a greater extent than VT (see VT’s composition vs VFIAX’s composition).
Obligatory not financial advice, I’m not an expert, don’t make any financial decisions based on hacker news comments, etc
The claim is that Nasdaq is going to artificially admit SpaceX to the Nasdaq-100, an index they control, in order to win their business away from NYSE. If the index you invest in is derived from the Nasdaq-100, that's problematic.
It seems kind of likely that SpaceX would make it into most of the major indices on the merits, relatively quickly (the S&P has a 1-year waiting period), just based on its likely size and liquidity.
Yeah the ETFs have sold off their trust quite a bit in the past year. No longer can anyone with skin in the game trust the stewardship of the fiduciaries. They are simply showing that they are bad at what they do and people should not entrust their future to them.
Pull your money out of the target date funds and into a responsible mix of indexes.
I think you have it backwards. Many (most?) funds underperform the market as a whole, showing they really don't know anything. ETFs that mirror indexes exist exactly because of this... their managers don't make trades based on their insight of the market, they are contractually obligated to mirror the index, period.
The article shows that at least some ETFs -- NASDAQ index funds -- will now be undermined by this SpaceX scam using those contractual obligations to extract money from ETF investors.
Good question. I don't know, but I'll point out that different indexes have different rules, so someone would need to check if a change to the rules for Nasdaq indexes affects the others you mention. (Perhaps they follow what Nasdaq does somehow?)
To be fair, QQQ is not really an index fund. Unless you think that I can make up whatever arbitrary list of stocks I feel like, and call it an index, and create an ETF that tracks it, and still call that an index fund.
Vanguard is probably the most principled when it comes to passive index tracking, and they do not have an ETF that tracks the NASDAQ 100 (or any fund that focuses on a single stock exchange for some inexplicable reason).
Either way, no, high frequency trading firms are going to beat you to the punch. And shorting elons other company, just because it's over valued by traditional metrics, didn't work out that great for most traders.
This is a slightly tongue-in-cheek way of saying that if you believe a security is severely mispriced then there is a straightforward way to express that opinion.
Shorting is really not that straightforward. It is a avery advanced topic because it mandates the use of leverage. Many (most) investors are long-only, especially the ones being taken advantage of here.
> especially the ones being taken advantage of here.
This is a great argument why buying an index is a poor choice for a long term investor. You can avoid a great deal of shenanigans by randomly purchasing stocks and holding them for 50 years. Even a 0.02% annual fee costs you 1% of your long term returns over that timescale.
Tesla has been this for a long time since the price fundamentally does not reflect the quality or future of the company, yet the road is littered with dead Tesla bears.
Efficient markets hypothesis breaks down with Musk companies.
Silicon Valley is mostly made up of schemes designed to defraud investors disguised as the hottest new tech startups. Elon recognized this sometime around 2020 (likely starting with his foray into the world of the crypto pump/dump) and decided to skip the formalities and go straight to the fraud, no apologies. That's been his business model ever since. His companies are just a vehicle for this now.
The problem is that it's very hard to avoid if you have a pension plan, and millions of Americans will subsidize Elon Musk without knowing. This is really messed up.
And "pension" in the US usually implies defined-benefits, meaning you don't actually care what it invests in. If you're talking about defined-contribution retirement plans like 401k, you are very unlikely to be invested in QQQ without consciously making that decision on your own.
Honestly, they're probably subsidizing Elon already via Tesla, but the super disturbing part here is what the author nails when he says the tail is wagging the dog. Indices should reflect market investment, they shouldn't drive it like this.
It's so bad. I could write a series of books about all the problems with the current system. There are so many.
These index funds are a mechanism for monopolization of 'the market' and it affects real people and it suppresses other markets through the perverse incentive structures it creates.
For example, I launched a crypto project back in 2019 which had its own decentralized exchange but ran into all sorts of hurdles with US regulations and also, the leaders of the community I was involved in were actively suppressing and slandering my project and propping up their biggest competitor's tech instead! All under the nose of regulators who approved all of it! I couldn't believe my eyes and neither could the community. But eventually it's like everyone started assuming that corruption and suppression was normal.
It's insane but it's like everyone is working to satisfy the big money and nothing else matters. Truth is suppressed, companies collaborate with their competitors and with regulators to deliver inferior goods and services to people while limiting their opportunities and dialing up surveillance and control.
At this stage, if I ever get the option to vote for a communist government, I would definitely take it.
Unofficially, we already have the worst form of communism now except the proceeds of the loot are distributed unequally and with a massive constant psyop running to convince people that what they get or don't get is a result of their own actions.
At least if we make communism official, we can shut down that psyop, acknowledge that the system is a controlled monopoly money machine and essentially just handing out money selectively and that the current criteria are arbitrary.
Once people accept the reality that the system has become an automated machine (since at least a decade) and that entrepreneurship and leadership has become redundant, then we can start thinking about fair distribution of the resources which the machine produces. The self-made people are not self-made, they are system-selected. Homeless people are not all lazy or incompetent; they are system-unselected. They didn't become homeless because they were crazy; they became crazy because they were made homeless. They became crazy trying to make sense of what happened to them. They couldn't figure it out because many if them did nothing wrong. They just got caught in a mental loop trying to fix stuff that they couldn't fix because it wasn't in their control. Their fate was always in the hands of the system.
I think the worst part is that some people who were given favorable treatment by the machine actually do believe that they earned their place. They don't know what it feels like to have all the algorithms suppressing their work and opportunities. They think their privileged treatment by algorithms is normal and same as everyone else.
Funny how all this rule making happens so quickly for friends and family members and donors of the Trump administration. Just like it recently did for SpaceX when they got approval for launching 1 million satellites. The corruption is so out in the open, but it is happening all the time - and there are other controversies already like the Epstein files, ICE, Iran, etc - so these go unnoticed. Our political system is broken.
Transparent enough, just trade it based on the new weightings and price direction of the underlying SpaceX
The index will have cheaper options contracts than SpaceX while disproportionately subject to the same volatility
That’s the biggest and most egalitarian wealth creation engine in history, aside from some government moves this administration with the currency and commodities
This is only controversial because
A) you’re too married to indexing and told too many people to do it
B) you consider indexing to be sacrosanct for some reason, and consider inclusion to be a reward when it means nothing. this is a symptom of prosperity preaching
To explain the mechanism simply.
Suppose you had a index of 100 companys each with a market cap of 1 G$ for a total of 100 G$. You have passive investors owning 20 G$ of that index, amounting to 20% of the total, 20% of each company, and 200 M$ per company.
You then rotate out a company for a new one also worth 1 G$. The index is still 100 G$, but to match the index you are contractually required to sell your 20% ownership of the old company and are contractually required to buy 20% ownership of the new company.
However, the newly added company only released 5% of its shares to the public and the founder kept hold of the remaining 95%. Those fund managers are contractually obligated to buy 20% of the newly added company, but only 5% is available. Like a short squeeze, where the squeezer buys and holds supply so there are not enough purchasable shares to cover the shorts (obligated ownership), this is a financial divide by zero.
To get the remaining 15%, which they are contractually obligated to acquire, they must purchase from the founder. As they are in violation of their contract if they fail to acquire the remaining 15%, the founder now has complete control to dictate any price they want.
That is the scheme described: how to short squeeze retirement funds who do not even have shorts for fun and profit.
Note that this is a minor variation on my post on the same underlying topic here: https://news.ycombinator.com/item?id=47392325
This is wrong in multiple ways.
First: 5x5 is 25, not 20. So it's 25% rather than 20%
Second: they only have to buy the 25% of the listed shares.
To take your 1 Trillion example: if SpaceX has a total market cap of 1T, but only 500b get listed on NASDAQ, and the free float is 5%, the index will weigh SpaceX at 25% of the listed shares, which means it will be weighted at 500 * 0.25 = 125b.
And also note that index ETFs have tracking errors all the time (that's why arbitrage traders still have business!), and the ETFs themselves could also track the performance of SpaceX via derivatives instead of buying the stock. And I think, there are many investors of SpaceX who would like to sell some shares. Fund managers won't have an issue finding their phone numbers.
I don’t think Nasdaq is free float based.
Also, I would be a lot more pessimistic of the index tracking fund managers’ ability or willingness to find extra shares: their goal is to match the index, not beat it. If the index includes the new firm at a blown-up price because everyone sent their buy orders at the same closing auction, then all the index-tracking funds still track their underlying index. They do not care that after that closing auction, the price of the new firm—and likely the index itself—is going to drop.
But the real scenario is going to be different in two ways: Market capitalization of the new company will only be a small fraction of the index total, even after it's been inflated as indicated. And not all investors in companies on the index are index funds, which brings down the number shares needed to align a fund.
Maybe they propose the rule change because it adjusts for some other problematic effect of the existing index rules? The discontinuity might seem acceptable because it is unlikely to be reached according to their simulations.
Yes, when SpaceX gets added to the index, it's going to skyrocket for just that reason. The other reason why SpaceX stock is going to skyrocket is because of the "infinite potential". After all, Elon is going to be God-Emperor of Mars, and how much is a piece of that worth?
The OP knows this and wants a window to profit from this squeeze. For the general public index owners, the sooner it's added to the index the better, minimizing the time that traders can front run this squeeze ahead of them.
Perhaps better it's not added to the indices at all, but as long as it's inevitable, the sooner the better.
Being added to the index is literally the only thing causing "the squeeze" according to this description though so how does that benefit either the author or the index holder?
If the stock was added to the index at a normal period then all the shares would be available.
SpaceX has always been a about convincing private industry to fund the militarization of space.
See https://en.wikipedia.org/wiki/Golden_Dome_(missile_defense_s...
Mars is a thin cover story to get the engineers to feed the War machine. "National security" / nuclear threat is a great excuse to get politicians to sell out the country.
How about we focus on global security?
> To get the remaining 15%, which they are contractually obligated to acquire, they must purchase from the founder. As they are in violation of their contract if they fail to acquire the remaining 15%, the founder now has complete control to dictate any price they want.
I can't imagine "any price they want" is quite right here. At the very least, shouldn't we expect underwriters and other stakeholders (in this case Nasdaq, Inc.) to negotiate option-contracts as part of the IPO deal to cover their future obligations?
Yes, it might be a "worse" deal than those initial 5% - though we don't even know that - but then institutional investors time horizons are typically much longer than 6 months. Unless you think SpaceX goes straight down to 0, it seems like a risky but calculated, long-term investment.
I agree they could be more transparent about it, but maybe they will send out a notice in the prospectus update?
Index funds have a variety of ways to replicate the index beyond physical replication, including options, buying "similar things", sampling etc..
So yeah, they don't really need to stick to 100% of the presented issue.
Index funds and ETFs also have strict replication rules limiting the amount of non-physical replication in their legally binding prospectus...
The more physical a tracker is, the lower the tracking error, but also the more fees you have to pay. "Good" ETFs/IFs are often 98% physical. This makes for higher fees, but more safety for subscribers in case of large swings.
So it's not like they are _free_ to replicate however they see fit, the replication mechanism is part of the product.
What does physical mean in this context?
It means holding the actual stocks in the underlying index, as opposed to synthetic replication, which aims to achieve returns matching the index via derivatives or other techniques.
It's physical in the sense that literal means not literal nowadays.
>That is the scheme described: how to short squeeze retirement funds who do not even have shorts for fun and profit.
How many retirement funds use the nadasq 100 as the benchmark? The only thing that's really objectionable is the 5x multiplier, and so far as I can tell that's confined to the nasdaq 100 index. If the funds use a sane index without such shenanigans, it won't be affected nearly as much, and the whole debate just turns into the perennial question on whether [company] is overvalued and whether passive investors are being taken for a ride.
Most indexes will be affected. Two of the most common indices - the S&P500 and DJIA - are cross-exchange and include Nasdaq stocks. The biggest market cap companies on the market (MAG7) are all on the Nasdaq exchange and comprise about 35% of the S&P.
Is this grey cause it's wrong? They are all on Nasdaq; and also around 35% of S&P. What am I missing? Is it that the "Most indexes" part is wrong (cause there are more than a few thousand ETF)?
Yeah, it's wrong.
Nasdaq, Inc. is a company with a stock market ("the NASDAQ") and an index "Nasdaq 100"). They want SpaceX to be listed on their market, because they like having more things on their market for all the usual reasons. They are, apparently, offering to manipulate their index to win the listing.
Accordingly, anything that uses or tracks this particular index (Nasdaq 100), such as the QQQ fund, will potentially have to pay for this manipulation.
Anybody not holding or indexing to the Nasdaq 100 index contents will not particularly care and will not really gain or lose any more money than on an ordinary trading day. In particular, this will have zero effect on stocks that merely trade on the NASDAQ exchange.
Indexing to the Nasdaq 100 is pretty uncommon, outside of QQQ, so most people will not care.
What?! This absolutely affects more than Nasdaq 100 / QQQ.
The index is just a function of the stocks. It only moves if the underlying stocks move. Rebalancing Nasdaq will cause selling in the 100 companies that aren’t SpaceX. And those stocks are held elsewhere too…
The Nasdaq 100 shares 79/100 stocks with the S&P. So if those stocks move (probably down because they’re being sold so SpaceX can get bought) pretty sure that's gonna affect anyone exposed to those companies. Whether that’s directly or through other index ETFs. Many of which have a huge concentration in Mag7 right now, for example.
What you're saying is 100% correct, I fail to see how people are not aware of it.
We're talking about a $1.75 trillion (as per the article) company that is about to enter (a part) of the most important capital market in the world at a distorted price, of course that the market as a whole is going to become distorted, money and capital (and the accompanying money and capital signals) are one of the most "liquid" things in a modern economy (if not the most liquid), once you start putting a wrong price tag on them then those accompanying money and capital signals will for sure start doing their thing, imo that was one of the main lessons we should have taken from what happened back in 2008-2009.
Actually these two indices will not be affected k as the article explains
I don’t see that in the article. The only thing I see is about S&P is where they mention that the S&P 500’s rules would prevent this manipulation if SpaceX were added to that index. But that’s not being proposed.
> To get the remaining 15%, which they are contractually obligated to acquire, they must purchase from the founder. As they are in violation of their contract if they fail to acquire the remaining 15%, the founder now has complete control to dictate any price they want.
This is not correct and I'm surprised this comment is upvoted to the top. The float is the float, nobody goes to buy shares that aren't available in the float.
Who is contractually obligated to buy?
I have an index fund for NASDAQ with my broker. When I bought into the fund, the broker promised me that with my money, they will buy shares in companies traded on that exchange according to the specific formula that SpaceX is manipulating here. My broker is obligated to buy. They could open a new fund that has a contact like "we'll keep doing what we had been doing except for the whole SpaceX thing" but they would need my permission to move the money. And I'm only in this fund because it was recommended by my 401k provider -- I don't know anything about any of this. That's the messed up thing here -- the people being screwed are not sophisticated investors, it's nurses and school teachers who hope to retire.
Yeah basically this. These shenanigans water down the value of QQQ. The bottom line is if you don't like QQQ, then dont buy it. Buy the stocks separately or a different index. But for people who don't pay attention, or for people whose 401k's limit their investment options, it is difficult / impossible to avoid the shenanigans
and that's why sector specific indexes are not "good" - only broad market (heck, even global) indexes are worth passive investing for.
A nasdaq index is no different from any other thematic index (like an oil index, or a robotics index). Thematic indexes tend to fail the investor in the long term for capturing beta. But because of lack of knowledge of the _actual_ academic research by retail investors, a lot of clever marketeers sell the idea of a thematic index as tho it is similar to a broad market index ("safety" and diversification).
Caveat emptor.
Some funds promise to track the Nasdaq. I guess the idea is they can't sorta track it and they can't artificially track it through some financial proxy. They have to own real shares?
I’m trying to understand the mechanics here. I get that SpaceX and Nasdaq are in cahoots to get SpaceX bundled with a bunch of other stocks (and that bundle is called QQQ?)
But why must retail investors hold this bundle? If I’m holding now, I can sell it and buy a different bundle right? And if I’m not holding it now, I can just continue not to buy it after SpaceX gets included.
There's trillions of dollars sitting in indexes that are quite literally 'passively' invested. Virtually everything holds this bundle in one way or another. Passive indexing has both outperformed and overtaken active investing - leading a lot of money into VOO/VTI/QQQ/etc that track the S&P500 or some other index ("the market"). For retirement funds like 401ks, retail contributes money every paycheck that gets routed into these indexes. There may not even be much of a choice - your 'plan' may only let you pick some kind of "Target Date Fund" and then the institution picks what it goes into, usually indexes.
If you fully actively managed your own money and picked mostly individual stocks (not broad indexes) then yeah you could change your allocations. But there's a lot of money already in.
QQQ is problematic because it’s influenced by strange back room dealings with Space X, if the article is to be believed.
VTI is different. It literally tracks all public stocks, weighted by market cap so no such manipulation is possible.
If a bunch of people will be forced to buy Space X (QQQ holders), active investors will short the stock in anticipation of market correction and money will flow from those who were forced to buy. I’m sure there are other ways to take advantage of a forced buyer situation.
Total market will be unaffected, assuming efficient market hypothesis / no arbitrage.
QQQ is not in isolation. It’s just a bundle of stocks. Rebalancing that will affect the prices of its constituent stocks, which include some of the highest market cap stocks. Those same stocks are also in many of those other popular market-cap weighted indexes (VTI, VOO, SPY, etc). Price action originating from Nasdaq 100 rebalancing would affect everywhere else those stocks are held. Which is a lot of places.
Except those other indexes won’t have SpaceX. Suggesting any index price moves would be … asymmetric at best.
Now it’s being reported that they’re angling to get SpaceX in the S&P 500 index as well [1]. Maybe if all the indexes get it then it balances out everywhere, who knows. This whole event would be in beyond unprecedented territory.
[1] https://finance.yahoo.com/news/p-weighs-rule-changes-speed-1...
Yes, you can sell and buy a different index. However, those who buy ETFs want broad market exposure without picking stocks (or ETFs). Also selling and re-buying means you have to pay taxes now - depending on jurisdiction, that is way worse than holding till you are retired and then selling.
SpaceX/Nasdaq want to distort the rules to make more money off the backs of those passive investors.
Bingo. No sane investor holds QQQ because there is no academic theory behind why it should exist. Why is a stock better if it's listed on NASDAQ instead of NYSE? Can any investor answer this question? Doubt it. If you are into factor investing and you like large cap growth, you buy something like VUG. Most people should just stick with SP500 or total market.
However, QQQ had a really good last 15 years and lots of investors hold it because they are chasing returns and because the marketing worked. (The managers of QQQ are legally obligated to spend X% of the fees collected on advertising the ETF, ha ha ha.)
> No sane investor holds QQQ
There's more than $1T tracking Nasdaq 100, so that's an ignorant statement.
> Why is a stock better if it's listed on NASDAQ instead of NYSE?
The NASDAQ is a stock exchange based in the United States. It’s made up of around 3,500 companies, with a heavy weighting towards companies in the information technology sector.
> If you are into factor investing and you like large cap growth
If you are into factor investing and like large cap tech, you buy something like QQQ.
> No sane investor holds QQQ
The insane can take comfort in their 20% CAGR for the last 10 years on a massive large cap tech expansion.
If you are a financial brokerage and you want to offer the S&P 100 or the NASDAQ 100, you can't just do that. You have to license that - https://www.spglobal.com/spdji/en/custom-indices/solutions/
I imagine, though I don't know, that the requirement to use the index name and contents also dictates allocation.
https://en.wikipedia.org/wiki/Index_fund
Does this only affect money invested after June 15th, or does this also devalues money invested before this date? If you don't invest anymore money in the index during the interim rebalancing period refered to by the author, then one should be alright. Right? It's really expensive to get all your marbles out, I'd rather not do it if I don't have to.
Right, you are trapped if you are holding QQQ in a taxable account and have substantial gains, so you should do nothing with the shares you already have. But no, ceasing to invest in it will not save you. The rebalancing discussed in the article happens internally with you already invested dollars.
But do take this moment to realize QQQ never made sense to invest in, and put your future dollars somewhere else. There are plenty of funds that overweight large cap tech but track an index that doesn't care which exchange the stock is listed on.
QQQ rebalances on a schedule. Existing holders are affected because the fund’s underlying composition will change.
This. If you are invested in a Nasdaq index (e.g. QQQ), it will have to sell some of the tail and buy the necessary weighted percentage of Snake Oil. Apart from you buying snake oil, you will realise some extra capital gains/loses due to the rebalancing.
And to be clear it's not just QQQ; countless retirement target date funds have a Nasdaq component. That's the real target of this grift, your retirement fund.
Tsla is 1.4T market cap, so it's almost like *ELON-stock is going to double in 1 day. It will go from 4% to 8% of qqq in 1 day.
It'll happen a week or a month after IPO date though? It took fb/meta 1 year and then it entered as 1% qqq. TSLA entered 3 years after IPO so probably a small percentage.
Tsla is 2% vti (2T AUM). QQQ is 400B AUM. So add those two and you get $56B of purchasing. This seems like the amount they want to raise via IPO in total in the news, so the banks who do the IPO can sell it all guaranteed.
But people will want to buy it before it gets into the passive funds... So... Post inclusion market cap will be higher than we expect?
It's a small club and you ain't in it
Any Canadians in the room should remember this as the exact mechanism by which Nortel Networks became astronomically huge. Any time Nortel got more valuable, index funds tracking the Toronto Stock Exchange (TSE) loaded up on Nortel, amplifying the price increase. This gave the company massive amounts of capital to buy other companies with, which generated more headlines, which brought in more investor capital, which brought more index funds in. In fact, at one point Nortel was so valuable it made the TSE too homogenous to legally index, at least until Nortel lobbied Canada to change the rules regarding diversified index funds.
If you aren't Canadian (like me) you can watch this Bobbybroccoli video that explains it very well: https://www.youtube.com/watch?v=I6xwMIUPHss
Spoiler alert for the Bobbybroccoli video, but it turns out this trick doesn't work forever. And when Nortel inevitably crashed it left a good chunk of Canadians as bagholders. And looking at the stock market over the past few years, where basically all the the growth is seven companies, I'm starting to wonder if we're finally seeing America's answer to the Nortel fiasco.
(No, Lucent doesn't count, even though they're literally America's counterpart to Nortel. The key factor that made Nortel a problem was the lack of diversity in the Canadian market. Lucent crashed and burned in a field of hundreds of growing big-cap stocks, Nortel was an extremely big fish in a tiny pond.)
Why can't an index fund compute and track their own objective index, thus ignoring any distortion introduced by the Nasdaq?
They don't target something else because they wouldn't be an index fund, that's just a passive fund with their own published strategy. Those exist but aren't as popular, the appeal of index funds is that you're just getting "the market" and "the market" is measured by the index. Public indexes are supposed to be lower-cost and less manipulable, but that was before they got large enough to "wag the dog," which is the ultimate point of the article.
Because when I buy QQQ expect it to track the Nasdaq-100, not something else.
Vast majority of index funds do not track NASDAQ 100.
This is the detail I'd really like to know more about
The top 3 most popular index fund ETFs track S&P500, which doesn't really pull this kind of shenanigan. Only QQQ tracks the NASDAQ 100 and it's in 5th place by assets under management.
You should probably read a book about index investing if you are going to invest.
Yeah, but the S&P500 is hugely concentrated in MAG7, which are all Nasdaq listed. So when they all get sold to buy SpaceX, you can bet your butt something's gonna happen to a S&P500 ETF.
Does the author realize the ai slop image does not make any sense?
I get the allure of AI images for blogging, but for Pete's sake review what you're publishing or don't do it.
Yeah, the funnel should be going into the duck's bill of course - is it still so hard to get AI image generators to respect such small but decisive details in your prompt?
TIL that foie gras is made out of duck livers as well, not only geese. Not that I'm more likely to eat any now that I know that, but anyway...
Really the same mechanics with crypto
I came here to say this, too. I remember hearing "500M market cap!" and then realizing that was because one person created a new token with 1M coins, bought one themselves for $500, and then started screaming "$500M market cap!" Technically it is true, but it really takes the "greater fool" theory to new heights.
Lmao inclusion after 15 days is going to throw off the waiting curve on index arb desks.
The market usually prepositions a lot of volume pre-add, so much that the add day is usually a non-event. But they usually have a quarter or more to preposition. 15 days is going to cause so much volatility and chaos.
And the funny thing is, the index arb desks can't really opt out of this - you can't arb all names except one in the index.
What a shitshow this would be if the rules pass as presented by Nasdaq.
Also, does Nasdaq think it's worth killing the reputation of their index for the spacex listing? An index is just a list that everyone agrees on following. Losing public trust in this list could mean the end of Nasdaq 100 as a serious contender. There are many alternatives that could easily take its place.
>Also, does Nasdaq think it's worth killing the reputation of their index for the spacex listing?
If I had to guess, they are banking on the meme-factor. Tesla is already seriously overvalued IMO b/c it's the first real meme-stock. Now, they are learning lessons from the FTX-invented low-float meme-tokens in crypto and replicate the model in stocks. The story around SpaceX with it's valid successes makes for a very good meme-stock.
So, they hope that people actually want SpaceX exposure no matter what and do not understand how cancerous those low-flow/high-FDIV launches are.
Very few here know what a index arb desk is and they won't care.
And those desks [should] have quants that are paid a lot of money to figure this out. If they don't, they will get eaten, as they should.
source: Worked on a ETF trade desk.
Anyone know if vanguards VTI is immune from such practices?
VTI just tracks the CRSP US total stock index, see https://investor.vanguard.com/investment-products/etfs/profi...
The CRSP index itself adds new companies within 5 days of their IPO, see https://www.crsp.org/what-owning-the-market-really-means/
> The CRSP US Total Market Index, by contrast, adds all IPOs ranging from mega caps to small caps—accounting for 98% of the market—within the first five trading days of the stock’s listing.
So it sounds like SpaceX will show up in VTI sooner than in the Nasdaq100, even with their new "fast entry" rule.
The actual scheme described in the OP requires the multiplier to work, though. Otherwise it's just like any other company that's tightly held, in which case only the free float counts and the scheme unravels.
vti is free float adjusted, so not as susceptible. But:
Elon will naturally do everything in his power to pump his stock, as every CEO does, and VTI buys shares in proportion to how successful that is. That is the nature of passive, market cap weighted investing.
If you want to underweight Elon's companies, or, generally, weight companies based on something besides market cap, you have to get into active or factor investing.
It mostly doesn't matter though, because if and when one stock drops, those investible dollars will likely flow into another stock, so VTI doesn't really care.
Obligatory video from Patrick Boyle
https://www.youtube.com/watch?v=8rS3fTbC7TE
Edit: someone posted it on HN, there's already a thread for it : https://news.ycombinator.com/item?id=47388640
This is not a prediction.
SpaceX is looking at an IPO in the range of $1.75T on revenues of ~$16B. That's ~100x revenue (let's ignore the net for the moment).
How have recent IPOs done when they went out in the neighborhood of 100x revenue?
rule wrecked, big one first, just like us gov current did.
Uh, can someone explain this to me like I’m 5, but somehow still have money invested in index funds? It makes me sound like my invested-in-vanguard-total-market-indexes-and-fidelity-target-date-funds money is going to be mechanically dumped into Elon Stock because of FinanceWord FinanceWord FinanceWord gobbledgook FinanceWord but is that the correct reading?
Index funds divvy up money into stocks, in this case weighted by market cap. More market cap = bigger slice of the pie.
SpaceX wants to instantly jump near the top of the pie - capturing tons of the money in index funds for itself, and also therefore taking it away from other companies stocks.
SpaceX (and others like OpenAI, Anthropic)'s private market cap valuation is so high that if they IPO they would instantly jump to the top of the entire stock market. This has never really happened before. By the rules, funds would have to suddenly start buying a huge weight of SpaceX stock - and sell NVDA/AAPL/GOOGL/everything else - to achieve the new balance.
Normally there are rules on how fast a new company can get included in the index. You usually have to be on the market for some time, demonstrate consistently high valuation, etc etc. SpaceX wants to skirt this and jump straight onto the index (near the top).
Further, the rules also usually weight you according to how much of your stock is actually on the market. If you only sell 5% of your company, you only get weighted at 5% of your market cap. SpaceX wants a bonus multiplier so even though they'll only make 5% of their stock available for sale, they want to be weighted in the index as if it was say 15% available. Aka over-bought / boosted price.
This creates both mechanical forced buying and artificially constrained supply. Likely sending the price to the moon, not based on fundamentals but based on gaming the index rules.
Then, once insider lock-up periods are over in a few months, SpaceX can choose to release even more shares - say jumping the available shares from 5% to 100% - which will unleash their full market cap (now even further inflated) and thus capturing even more of the money in index funds.
Index funds being 'passive' guarantees there will be buyers for SpaceX employees and executives to sell their shares to, likely at exorbitantly over-valued prices. At which point they wash their hands of the valuation and your retirement account becomes the new bag holder who has to worry about whether SpaceX is actually worth what you just paid for it.
And if you an approximate 5 year old investor normal person…
Just buy everything you can on day1 and go along for the ride?
> Just buy everything you can on day1 and go along for the ride?
What does adding demand to something with a very limited supply do to the price? You won't be subverting anyone's plan here - you're just hoping for a greater fool[1] will buy from you later, if you buy at inflated prices on day 1.
1. https://en.wikipedia.org/wiki/Greater_fool_theory
Maybe use your lunch money to buy day 1 and sell just before the lockup period expires? And rebalance your actual retirement accounts into funds that will not get forced into this game.
If you are an index investor, it is probably not worth your time and energy to make any drastic changes because of this particular incident. Space X will comprise a small percentage of the indexes in question, and any impact on your portfolio will likely be imperceptible. And if your holdings are in a taxable account, the tax hit from selling are probably not worth it.
Longer term, folks should be aware that Wall Street has fully caught on to the normalization of index investing and have been looking at ways to use passive investors as exit liquidity. Private equity and private credit are the two recent high profile examples. There was an executive order recently that directed the federal government to consider allowing these asset classes into 401k's. And these sectors have been increasingly making there way into the public markets in various ways (which is ironic considering the name of the asset class). Same story with crypto.
In the past, most passive index investors worried about fees and portfolio composition and diversity. But moving forward it is probably worth thinking about index governance as well. For example the S&P500 has a one year waiting period before an public company can be considered.
Do you have specific recommendations for particularly well-governed indexes? Is something like ESGV insulated from such manipulation? Or is it time for investors to start building their own direct/custom indexing with something like Frec
My recommendation is do not take investing advise from any post on HN. They are notoriously bad about understanding capital markets. There are a few good posters here but they are boring [factual] with 0 replies.
My understanding: It depends on what index the fund is tracking. QQQ tracks the Nasdaq-100 so QQQ is vulnerable. VT tracks the FTSE Global All Cap Index so VT is not directly affected by Nasdaq’s choices but is still exposed to some extent because spacex is likely going to be in the aforementioned FTSE index, Nasdaq’s actions impact spacex’s market cap, and thus Nasdaq’s actions impact spacex’s position in the aforementioned FTSE index which in turn affects VT’s composition (to a smaller extent than QQQ’s).
EDIT: to be clear the above are just examples with two funds (QQQ and VT)
FTSE Russell is proposing changes similar to Nasdaq, with the consultation ending 18 March.
VIFAX?
I think it’d be a rinse and repeat of the line of thinking for VT but more exposure than VT.
From VIFAX fund’s description on vanguard:
> The fund offers exposure to 500 of the largest U.S. companies
Based on the comment from [1] it seems like the issue with nasdaq is that anyone tracking it is contractually obligated to include spacex? What about for other funds? VIFAX description says
>The Global Equity Index Management team applies disciplined portfolio construction and efficient trading techniques designed to help minimize tracking error and maintain close alignment with benchmark characteristics [of S&P 500].
So given that this only affects NASDAQ i'm guessing they aren't affected? And even if S&p 500 started to play the same games, why can't their supposedly disciplined "Global Equity Index Management team" simply opt not to play along with these shenanigans? Or if they simply do mechanically track the s&p 500, what exactly is the "management fee" paying for?
[1] https://news.ycombinator.com/item?id=47394355
There’s a lot to address here but in short: VFIAX is an index fund, it tracks the S&P500 index, it’s not actively managed, SpaceX will likely be in the S&P500, so my comment around VT applies to VFIAX (as far as the question of exposure is concerned) but to a greater extent than VT (see VT’s composition vs VFIAX’s composition).
Obligatory not financial advice, I’m not an expert, don’t make any financial decisions based on hacker news comments, etc
The claim is that Nasdaq is going to artificially admit SpaceX to the Nasdaq-100, an index they control, in order to win their business away from NYSE. If the index you invest in is derived from the Nasdaq-100, that's problematic.
It seems kind of likely that SpaceX would make it into most of the major indices on the merits, relatively quickly (the S&P has a 1-year waiting period), just based on its likely size and liquidity.
Yeah the ETFs have sold off their trust quite a bit in the past year. No longer can anyone with skin in the game trust the stewardship of the fiduciaries. They are simply showing that they are bad at what they do and people should not entrust their future to them.
Pull your money out of the target date funds and into a responsible mix of indexes.
I think you have it backwards. Many (most?) funds underperform the market as a whole, showing they really don't know anything. ETFs that mirror indexes exist exactly because of this... their managers don't make trades based on their insight of the market, they are contractually obligated to mirror the index, period.
The article shows that at least some ETFs -- NASDAQ index funds -- will now be undermined by this SpaceX scam using those contractual obligations to extract money from ETF investors.
Good question. I don't know, but I'll point out that different indexes have different rules, so someone would need to check if a change to the rules for Nasdaq indexes affects the others you mention. (Perhaps they follow what Nasdaq does somehow?)
You are fine because you don't hold QQQ.
Let them eat foie gras! It was only a matter of time before they started manipulating index funds too.
To be fair, QQQ is not really an index fund. Unless you think that I can make up whatever arbitrary list of stocks I feel like, and call it an index, and create an ETF that tracks it, and still call that an index fund.
Vanguard is probably the most principled when it comes to passive index tracking, and they do not have an ETF that tracks the NASDAQ 100 (or any fund that focuses on a single stock exchange for some inexplicable reason).
So sounds like this will be a great short candidate after the index re-weighting.
What, QQQ or SpaceX?
Either way, no, high frequency trading firms are going to beat you to the punch. And shorting elons other company, just because it's over valued by traditional metrics, didn't work out that great for most traders.
This is a slightly tongue-in-cheek way of saying that if you believe a security is severely mispriced then there is a straightforward way to express that opinion.
Shorting is really not that straightforward. It is a avery advanced topic because it mandates the use of leverage. Many (most) investors are long-only, especially the ones being taken advantage of here.
> especially the ones being taken advantage of here.
This is a great argument why buying an index is a poor choice for a long term investor. You can avoid a great deal of shenanigans by randomly purchasing stocks and holding them for 50 years. Even a 0.02% annual fee costs you 1% of your long term returns over that timescale.
But there’s tradeoffs to everything.
https://www.proshares.com/our-etfs/leveraged-and-inverse/psq
This is not financial advise.
Tesla has been this for a long time since the price fundamentally does not reflect the quality or future of the company, yet the road is littered with dead Tesla bears.
Efficient markets hypothesis breaks down with Musk companies.
Silicon Valley is mostly made up of schemes designed to defraud investors disguised as the hottest new tech startups. Elon recognized this sometime around 2020 (likely starting with his foray into the world of the crypto pump/dump) and decided to skip the formalities and go straight to the fraud, no apologies. That's been his business model ever since. His companies are just a vehicle for this now.
Two things I learned in this article:
1. Garage 2. Buy SpaceX on Day 1.
I learned: sell all my Nasdaq etfs prior to June.
The problem is that it's very hard to avoid if you have a pension plan, and millions of Americans will subsidize Elon Musk without knowing. This is really messed up.
What pension plan invests in QQQ specifically?
And "pension" in the US usually implies defined-benefits, meaning you don't actually care what it invests in. If you're talking about defined-contribution retirement plans like 401k, you are very unlikely to be invested in QQQ without consciously making that decision on your own.
Honestly, they're probably subsidizing Elon already via Tesla, but the super disturbing part here is what the author nails when he says the tail is wagging the dog. Indices should reflect market investment, they shouldn't drive it like this.
Garage -> Gavage?
Yes, probably a typo.
gavage American [guh-vahzh, ga-vazh] / gəˈvɑʒ, gaˈvaʒ /
forced feeding, as by a flexible tube and a force pump.
It's so bad. I could write a series of books about all the problems with the current system. There are so many.
These index funds are a mechanism for monopolization of 'the market' and it affects real people and it suppresses other markets through the perverse incentive structures it creates.
For example, I launched a crypto project back in 2019 which had its own decentralized exchange but ran into all sorts of hurdles with US regulations and also, the leaders of the community I was involved in were actively suppressing and slandering my project and propping up their biggest competitor's tech instead! All under the nose of regulators who approved all of it! I couldn't believe my eyes and neither could the community. But eventually it's like everyone started assuming that corruption and suppression was normal.
It's insane but it's like everyone is working to satisfy the big money and nothing else matters. Truth is suppressed, companies collaborate with their competitors and with regulators to deliver inferior goods and services to people while limiting their opportunities and dialing up surveillance and control.
At this stage, if I ever get the option to vote for a communist government, I would definitely take it.
Unofficially, we already have the worst form of communism now except the proceeds of the loot are distributed unequally and with a massive constant psyop running to convince people that what they get or don't get is a result of their own actions.
At least if we make communism official, we can shut down that psyop, acknowledge that the system is a controlled monopoly money machine and essentially just handing out money selectively and that the current criteria are arbitrary.
Once people accept the reality that the system has become an automated machine (since at least a decade) and that entrepreneurship and leadership has become redundant, then we can start thinking about fair distribution of the resources which the machine produces. The self-made people are not self-made, they are system-selected. Homeless people are not all lazy or incompetent; they are system-unselected. They didn't become homeless because they were crazy; they became crazy because they were made homeless. They became crazy trying to make sense of what happened to them. They couldn't figure it out because many if them did nothing wrong. They just got caught in a mental loop trying to fix stuff that they couldn't fix because it wasn't in their control. Their fate was always in the hands of the system.
I think the worst part is that some people who were given favorable treatment by the machine actually do believe that they earned their place. They don't know what it feels like to have all the algorithms suppressing their work and opportunities. They think their privileged treatment by algorithms is normal and same as everyone else.
Do you think we're going to see the end of America as we know it within our lifetimes? Surely the system can't keep going on like this?
Funny how all this rule making happens so quickly for friends and family members and donors of the Trump administration. Just like it recently did for SpaceX when they got approval for launching 1 million satellites. The corruption is so out in the open, but it is happening all the time - and there are other controversies already like the Epstein files, ICE, Iran, etc - so these go unnoticed. Our political system is broken.
Transparent enough, just trade it based on the new weightings and price direction of the underlying SpaceX
The index will have cheaper options contracts than SpaceX while disproportionately subject to the same volatility
That’s the biggest and most egalitarian wealth creation engine in history, aside from some government moves this administration with the currency and commodities
This is only controversial because
A) you’re too married to indexing and told too many people to do it
B) you consider indexing to be sacrosanct for some reason, and consider inclusion to be a reward when it means nothing. this is a symptom of prosperity preaching