Correction: index funds don't have a choice. They must follow the index, and so must buy the stock.
side effect: they'll have to sell other stocks, pushing their prices and weighting in market cap weighted indexes down.
> Passive investors are unable to rapidly respond to these types of changes because liquidating portfolios will incur capital gains taxes. (?)
For some active investors, yes. For passive investors (say you through your employer's pension fund), the tax isn't the problem. It's that the market has such a short time to adjust the price of these companies before indexes are forced to include them--and so might buy them at wildly inflated prices. Then, not too long after, the early investors can sell at still-high prices as soon as their lockup periods end. It's a massive transfer of wealth from pension funds and index investors to the early investors in those companies.
Maybe, most indexes do not have to follow the index. they just need to match the returns. An index fund manager has choice of what stocks to buy. However an index fund doesn't have enough managers to make many choices and so they normally buy just what is in the index. However all index fund managers know they are large enough that if they change their holdings "instantly" when the index it self changes the market will collapse and so the fund will under perform. Thus index fund managers are always trying to figure out what the index will do so they can start buying/selling stocks in smaller amounts before the change happens.
How each fund handles this is up to the managers. (and "total market" funds have less ability and need to do this)
Just look up the performance of Mutual Funds vs S&P500.
Again, the vast majority of the time they are matching the index stocks. However they have the right.
Typically managers pay is such that they don't get awards for guessing correctly, so they won't get any upside from a correct second guess, and they will see downsides from incorrect guesses.
Also unlike traditional funds, there are not enough managers to follow every company, so they can't pick stocks that will win just because they don't have enough to time research the stock. When they pick a stock they are just looking at the high level will this company perform like the other peers in the industry long term.
On the other hand, do you want to be the one who says, "As a rule we follow the index, but this time we decided to break our own rule, and as a result we lost X% of returns"?
Better wrong with everybody else than wrong on my own.
Changing one of those features undermines the reasons for including the index. Doing it specifically for the purpose of including a firm where large pension funds have also been extraordinarily critical of the governance structure as a particular source of risk [0] even moreso.
[0] https://www.reuters.com/legal/government/new-york-california...
Right, if they've advertised as an S&P 500 index fund, they have to robotically follow the S&P 500, stupid inclusions and all. Changing that strategy would require ... a lengthy process involving input from shareholders.
However, someone can still start e.g. a "classic S&P 500" fund that follows the old rules for inclusion, and I suspect we'll see that in response to these recent decision.
Nevertheless it is part of a pattern of weird deals in Elon’s companies. He’ll do anything to move the goalposts and turn his failures into successes. There is no norm he won’t violate, no boundary he won’t cross.
But the story is not about all indices being wrong, the story is about index management being corrupted. Like bond ratings on mortgages in the run-up to 2008.
"Im too busy to spend 30 minutes to move my retirement somewhere I trust" just doesnt cut it.
People should honestly read Killing the Sacred Cows it’s an eye-opener for anyone invested in 401k.
Any funds lying around are supposed to be for temporary imbalances, but became significant due to a major demographic imbalance: the Baby Boom.
Doesn’t it say that it’s a retirement fund, intended to be saved until retirement age? The 10% penalty is little more than a wrist slap level deterrent, too. It’s usually like ~1 year of returns. Not a huge deal if you need to dip into it.
(There’s plenty to criticize about the whole 401k system of retirement accounts. But these criticisms seem misguided)
People putting retirement funds in a pile of companies that often have little impact on local communities they live in.
They’re changing laws to fast-track sketchy IPOs, putting hard earned money at risk why? So we can send people on a death-mission to Mars?
Point being, they are doing what they will with other people’s money and won’t suffer the consequences. Removing the checks and balances is exactly how financial disasters happen.
No, they absolutely don't fear prison (but they should).
It's just the aggregate behaviour of a group of people optimizing for short term profit and self-enrichment over everything and without any need for long-term careful planning because for various reasons they are pursuing the short term at all costs.
Let’s not make billions into a footnote?
Is 5% a footnote, maybe.
Twitter has about $13B of debt, and about $1.5B of annual interest payments (that’s how much cash it actually needs to come up with this year). SpaceX has a planned IPO market cap of $2T and plans to raise $75B cash during the IPO.
It could nonetheless be worth trillions by the end of the day.
Simple as.
To explore this (hopefully parody) alt history, I don't know why the us gov wouldn't waited 70 some years for spacex to reach this point to grant that monopoly versus handing it off to the usual collection of defense contractors, eg raytheon (or whatever they're called now), Rand, etc.
Unfortunately, if you really start digging in to what is going on in the financial world, you will find he has violated no norms here. This is not a defense of Elon; this is a condemnation of the entire financial industry.
The whole thing scares me, honestly. It has never been a clean happy market where lots of honest people get together and are just honestly trying to make a better world for each other, there is no golden past where people were just nice or anything, but damn if computers don't let people build some structures that the robber barons of old could only have dreamt of. I'm really concerned that "index and chill" doesn't just have a "best by" date but that the best-by date could be in the past; I've heard of an awful lot of ways of exploiting it and other retirements schemes we have, this is just one. I find it implausible that these ideas exist but nobody is doing them.
There is video explaining the process
7. ETF managers that track an index aren't allowed to put discretion into what they buy. They offer much lower fees because they don't have to do any thinking, just executing on an algorithm.
8. SpaceX servicing the X/Twitter debt isn't really a question. The total amount of debt is equal to about one year of revenue at the moment, and it's under 3% of the expected market cap of SpaceX. It's less than a third of what SpaceX's IPO is expected to generate selling new shares to the public. It's a non-issue. On the other hand, the fees the banks will get for the IPO could easily convince them to support the rules waivers.
9. This is true of some passive investors. It is not true of pension funds (which are usually not passive) or 401ks or other tax-advantaged retirement accounts. It is likely to be partly true for any individual depending on how much of their assets is in a tax-advantaged account vs a regular account.
10. Yes to Texas. It seems like the arbitration part is likely to be true (SpaceX is certainly claiming it in the prospectus), but there is not the certainty of having a long history of litigation.
Returning to 2+3: The rolling up of all other private Musk companies into SpaceX certainly impacted the investors in those companies, and how much Musk owns vs other people. But the equity adjustments there would be interesting, not the debt.
> ETF managers that track an index aren't allowed to put discretion into what they buy.
I detect a contradiction here.
Pension operators are not typically passive. It's a different story to say that maybe they should be given that their returns don't always match up with index funds.
Morgan Stanley, Goldman Sachs, JPMorgan, Bank of America, and Citigroup
They all know how idiotic Tesla investors are, and they all want those idiots to pick up their bags.
Also: SpaceX debt is $20 billion.