But as so many ETFs have a significant stake in large-cap US tech stocks (the top 10 holdings of the iShares MSCI World ETF is entirely comprised US Big Tech, making up 20% of the value of the ETF), I found S&P 500 Equal Weight to be pretty attractive.
As for SpaceX itself? I feel the numbers involved all sound a bit unbelievable to me. I fear that there will be a rug-pull sometime post-IPO, and retail investors (and taxpayers, if the US Government ends up taking a stake, as they have recently indicated they might do for OpenAI) will inevitably be left holding the bag.
The rebalancing required to maintain equal weights means constantly selling your winners and buying more of your losers. That creates volatility drag. Stock returns are highly skewed: only about 4% of stocks outperform the market, and are responsible for most of its gains. By keeping your allocation to those stocks small through constant rebalancing, you are missing out on a large part of their gains. The vast majority of stocks underperform.
Maintaining the equal weighting also requires constant trading, which generally means higher fees. A market weighted fund, in contrast, naturally maintains its desired balance in response to price movements, without any trading.
Also, the equal weighting ignores the amount of outstanding float for each company. If the fact that NASDAQ has not (historically) been float-adjusted (a common anti-SpaceX talking point) gave you concern, this is even worse, due to the multiple orders of magnitude difference between the largest and smallest companies in the S&P. If enough money enters the equal-weight index, this can spark large amounts of buying in (relatively) small companies that is divorced from their economic performance.
The equal-weight index has outperformed the market-weighted index in some periods (not in recent memory), but with higher volatility (so worse risk-adjusted returns). That outperformance can mostly be explained by factor tilts implicit in the equal weighting (e.g., a higher allocation to mid-cap value stocks).
You would probably be better off with a mix of market-weighted funds explicitly designed to give you the factor tilts and risk exposure you want.
The best defensive stock for those situations is WMT, but you can think of other similar names as you reason through the why. That's where I'd go. There are many ETFs such as VDC (Vanguard Consumer Staples).
If you don't want to be so defensive, you could go VTV which is basically "large cap value stocks" so it still includes some Tech like Intel but it's way more diversified into other industries.
Gold is more inflation-related, so I wouldn't go there, at least not for the 40-50% draw down scenario you're describing.
You could usually try utilities or energy but those are also high due to AI buildout & Iran.
I think gold could make a come back since it's beating down a bit this year. Treasuries or just a reasonable hedge with puts against your holdings may be the best bet.
Of course none of this is financial advice & is just open discussion looking for thoughts.
Personally I went 80% world excl US and 20% equal weight S&P500 to hedge against what I think is an AI bubble. But if the market decides to adjust Nvidia's valuation 20% downward next week, I expect there to be ripple effects throughout the economy.
(Like the .com bubble, I think the tech is genuinely transformative and here to stay, but the valuations are just ridiculous.)
Your concerns sound valid provided things continue on as they have (I'm not a financial advisor and this is not financial advice) but the commenters above you are specifically worried that it's not going to do that. In which case, the disadvantages you point out of the equal-weight index will be handily outweighed. If an AI bubble popping causes the market-weighted funds to suffer, it doesn't matter that we've avoided trading fees along the way.
If the SEC was doing it's job, there would sanctions or jail time for those numbers.
Second, these companies have looted America by hiding income in Panama/Ireland/etc when they've earned it on the back of American protection, American consumers, etc. It would be generous of the US government to offer corporate wealth repatriation and a token payment as part of deprivatization.
Why? If new technology is invented that enables us to do new things with fewer resources doesn’t that create wealth? It didn’t take it, it made a new thing.
My previous attempt was to consider it as a cost for AI companies to exist?
edit: We used to call that Fraud.
> because they used tax payer money to help fund them
Source showing a significant part of the investment was tax money?
Assuming that all the claims are true, this would lead to a collapse under its own weight, because at that point, supposedly, most people won't be needed in the jobs they currently occupy.
Assuming the claims aren't true, there will be a reckoning where all the glitter thrown will hit the ground and people that invested would like to have their marbles back at whatever the cost.
I'd be betting on the latter rather than the former. BECAUSE all those companies are RUSHING for an IPO because none of them want to be left with the bag.
Just for the sake of comparison and to put things in perspective, just for the spaceX situation, running a datacenter is no easy task and require significant maintenance and supporting infrastructure, now you're going to tell me that you can achieve the same and even more in space where virtually everything is more complicated to achieve? And you're telling me that your entire business, or at least a big majority of it, will be this entirely unproven infrastructure? Seems like a bit of a stretch to me...
Now this being said, somehow some things may lie in the middle, but people seem to be a bit either too fond of the claims or too aggressive towards some part of the tech stack.
I’m willing to believe the construction is plausible (maybe not cost-effective, but possible), and robotic operation of it is a stretch but with some optimism I could be convinced.
I don’t see how they can get rid of the heat, at least in a realistic way that isn’t “a square kilometer of black body radiation surfaces” or something equally “works on paper, so uneconomical it will never actually happen”.
Either there's a revolutionary heat dissipation system in the works they're keeping a secret, or my ass is getting a smoke rash.
I see this sentiment often, and think it is short-sighted:
1. The tech fails at the goal - profitability is what we see for any tech that augments humans, which isn't anywhere close to satisfying the trillions in debt, busting the market and bleeding trillions from the economy.
OR
2. The tech succeeds at the goal - humans are mostly not needed anymore other than for menial low-paid work. Economy slows, then almost completely stops.
What is the outcome you see that keeps you optimistic? How do you intend to avoid the soup kitchen if this all works out? Because, you see, if this all works out you will have nothing of value to contribute too.
I think the tech will work well for some tasks where a formal feedback loop exists (such as coding). In other areas it will take many years to adapt business processes and roles to make the best use of this technology. The total productivity boost could be around 1% p.a similar to the industrial revolution of the 19th century.
Stock prices could be at risk not from lack of demand but because the data center buildout is bound to slow dramatically as we come up against some serious bottlenecks like energy, grid, fab capacity, permissions, etc. Not much will have to be written off, but the delays could cause big problems for debt funded projects and companies.
This slowdown will allow the economy and the workforce to evolve away from execution and towards planning, strategy, research and development, idea generation, experimentation, oversight as well as manually handling a million exceptions and gaps left by current AI models.
I don't think there has ever been a tech boom without a tech bust. But that's not the same thing as the tech not working or causing economic collapse. Maybe this time is different. Who knows.
Economy slows or stops when AI robots are producing goods and services for much lower cost than human workers? Perhaps, but I think the obvious next development would be massive deflation: even on welfare or UBI, you would be able to afford the same quantity of goods/services than with normal wage today, because the stuff produced by robots would be significantly cheaper. Just like stuff produced in factories is much cheaper than hand-made stuff we had before factories were invented.
> Economy slows or stops when AI robots are producing goods and services for much lower cost than human workers?
You can't have an economy without employment.
>you will have nothing of value to contribute too
So perhaps I can finally rest and solely focus on the stuff that I like. For this to be a problem, we need to imagine a dystopian scenario where our systems (and those who run 'em?) are effectively all-powerful and also cartoonishly selfish for no good reason at all.
You can do that now anyway, but you aren't.
I repeat my question - how do you imagine the economy will function if humans have nothing of value other than janitorial work to offer?
In the long term there will be a lot of work that AI _can_ do as well as (or better than) humans, where the human is still nominally doing the work, because of liability and verification requirements (e.g. medicine). Beyond that, I expect influencer/independent media to become the new it job.
Same as the dotcom and same as the railroads.
These three companies can do great while their valuations go nowhere.
The problem there isn't the models, it's consumer hardware. Even 16GB cards aren't the norm, and even with massive improvements in per-parameter performance we probably still need 48GB memory to get models that feel smart enough to trust.
If you scoped it to “average gaming desktop”, double digit VRAM is pretty normal at this point. If costs came down, I imagine the higher end GPUs would start including enough VRAM for 30B-ish models.
How? They're building out on debt. The investors need to offload at a profit otherwise the company can't sell more shares to acquire the cash needed (share price too low).
Sure, it's possible that a recent IPO does poorly but the company soldiers on regardless, but it's not likely.
SpaceX sort of is. OpenAI almost certainly is. Anthropic doesn't appear to be.
How do you value the AI market? Sometimes inventions change the world and companies struggle to make money. Airlines and the entire aerospace struggle to make money but no one can doubt airplanes are one of the biggest changes an inventions in human history.
It does not necessarily follow that it being a technological revolution also means that it is a good investment—at least, perhaps, at this point in time. Railroads were a tech revolution, but a lot of them—and their investors—went bankrupt once the hype subsided and the overbuilding stopped. Once consolidation happened after their crash then railroads became a stable investment.
There are numerous examples of this in history, starting with (at least) canals; see Perez:
* https://en.wikipedia.org/wiki/Technological_Revolutions_and_...
If all that works out. Most people including me so far don't see the promised revolution, productivity gains are meager since not all of us work in code sweatshops churning simple crud or similar apps out like there is no tomorrow, llm models are extremely unreliable, confidently hallucinating shit out of blue, their quality highly varies over time as compute is present or not.
If thats your revolution, well fuck that revolution we can do better as mankind. Its probably a change, but bearing hallmarks of the worst in mankind we could muster together and seems to bring the worst traits out of humans, ie greed.
S&P requires 4 consecutive profitable quarters, amongst other requirements, so if one of the new mega caps like SpaceX or Anthropic or OpenAI get included, you’d probably want to get the benefit of their performance.
Put differently, if one previously specifically picked an index fund that is not equal weighted, why would you change from that strategy?
What performance? None of these companies have established "performance" and they are all still burning money in a race to be the industry leader.
There is no evidence these companies can be profitable without some kind of significant hardware advance.
The only substantial effect I've seen of the influencers who were doomsplaining this decision was some minor churn in retirement assets from low-cost S&P 500 followers to higher-cost funds. (The market, broadly, never priced in a rebalancing of the S&P 500. So this was almost entirely whipped up by influencers.)
Broadly speaking, if you were actually considering trading on the back of S&P's decision, or worse, if you actually did, consider trimming who you follow for financial advice.
Yup. Which is why it was always a long shot. I personally thought they'd adopt some of the seasoning rules, but they were more conservative than even that.
I suspect this will be revisited if all these companies are still 1T+ market cap 12 months from now. At some point the S&P will have to say the market itself has spoken and likely capitulate.
It really doesn't. The S&P 500 is an opinionated index. If you want total market, buy a total-market index.
My guess is S&P will stick to its guns, Anthropic will season in, and SpaceX and OpenAI (if it goes public) will stay outside for a few years.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
And if you had seen it what would have that pricing looked like?
Look up rebalancing trades, or, less graciously, rebalancing front running. If the index is going to rebalance to include a new entrant, you'll see the other components trade down in anticipation. It's a very tight signal, and it wasn't present to any measurable degree for the S&P 500.
Let's model an equal-weighted index with nine components, with each thus representing 1/9th of the index's allocation.
You learn that a tenth member is going to be added. You don't know who it is. But you know that each of those nine will, after that member is included, represent 1/10th of the index's allocation versus the 1/9th they did before. You know a precise bucket of trades everyone following the index is going to mechanically enter into. Which means it behooves you to be on the other side of it.
When rebalancing–or new inclusion–occurs, you see this pre-trading. Similar to merger arb. But much more clear as a signal because you see it in precise ratios across the index's members. It's difficult to pick up for small indices. But for something like the S&P 500, you'd expect to see someone selling those shares in anticipation, and, now that the rule isn't going into effect, someone dumping those shares in those ratios.
It would be visible at a macro level, you’d see a higher sell volume and probably a drop in price as all the equal weight funds rebalance.
There’s a heavy motivation to be the first mover here, because those sells will cause a supply spike and price drop. By being the first mover, you can rebalance before prices drop.
I don’t have sell volume data, but we didn’t see price drops so either a) the market did not believe and no one rebalanced, or b) few funds rebalanced, and the other funds disbelieved enough that they thought the risk premium was so small they could buy at a slight discount and profit, balancing supply and demand.
Would you see funds reducing their equity exposure and going into cash or what? Which funds would do that? Trackers wouldn’t do that so where would you see that withdrawal of funds?
> New entrant means you have to pull money out of existing stocks to re-allocate to the new entrant to maintain equal weights.
If you mean someone tracking an equal weight index the weights would be essentially the same after the inclusion of SPCX replacing some other constituent. Except for the stock being replaced, of course.
Also, S&P500 has a current market cap of $67 trillion, 0.3% of that is some $200billion. That is essentially a wealth transfer to the rich. They don't need it.
This percentage directly determines the influence on SP500 index funds holders (SPY, VOO, etc.).
The outcome could have been:
1. not included (0%)
2. included, weight by free float (0.3%) --- 54th in the list between $AXP and $MCD
3. included, weight by free float x 3 (0.9%) --- 19th in the list between $ORCL and $JNJ
4. included, weight by market cap (1.75 trillion / 67 trillion = 2.6%) --- 8th in the list between $AVGO and $META
https://www.slickcharts.com/sp500
#2 is _much_ closer to #1 than #3 (let alone #4), meaning that had an exemption been made to allow SpaceX in, given the rest of the existing rules, at least the impact to ETF holders would not be outblown. The same could not be said for NASDAQ , which was the main source of all the debate.
I can partly see the rationale - existing stockholders will want to ditch their stock ASAP to cash in on the artificially elevated prices, and so there's a good chance the free float will increase quicker than the index can capture it, but this rule change will be driving those sales. It's all a scam.
I'm glad a good chunk of my US holdings are in S&P tracked ETFs because they won't include SpaceX until it's ready, but another 25% of my funds are in funds tracking FTSE global indices (so equivalent to about another 15% in US), and I haven't yet found a good alternative to those. I might end up having to switch to separate UK, S&P 500 and global ex-US, but making that switch would probably cost me as much as just sucking it up and being forced to buy SpaceX.
Even with linear scaling, being one third of the way between two numbers is not what I would call underlined-much closer. But zero punches above its weight here. Those extra orders of magnitude should make some impact on the scale.
I'm sure you know this, but the rules have been changed many times over the years. Now that companies IPO much later with huge market caps, I suspect we'll see more rule changes over time. The S&P 500 is fairly conservative, so they held tight this time. If these companies are still 1T+ 12 months from now, there will be a very strong argument that the market has decided these companies are important regardless of current profitability, and the S&P will likely have to revisit.
These are not valid arguments. The companies that get added to the S&P are always owned in some fraction by rich people.
SpaceX is obviously majorly owned by Elon, but it’s also owned by regular employees, a bunch of private investors and other funds that regular people invest in.
> They're not profitable.
Right
> When they prove they're worth the dollars,
Profitable isn’t related to “worth the dollars”. You need to look at income and how much is being reinvested into growth. Amazon famously remained unprofitable due to reinvestment and waiting for them to become profitable before investing was a bad bet.
Amazon wasn't profitable because it reinvested earnings into growth, while SpaceX is funding it's growth by taking on very significant levels of debt (which will take a big chunk of future earnings just to service). These aren't comparable from a risk perspective.
Was this obvious early on?
But anyway, it's also clear SpaceX isn't doing the same as Amazon.
Sure, but we the only thing we know about the company is the current S1 filing. Need to time to see what all of that looks like. Fast tracking it and essentially forcing other people to buy without scrutinizing is the problem. They may very well be worth the money they claim, but we won't know until after they've proven it. That's what the rules are there for.
There is plenty of evidence of growth. The problem is SpaceX as it is is a conglomerate recently cobbled together, and so estimating what it is and what it's going to do is challenging.
We don't have good public numbers, but that should be over $13B in revenue and about $2B of income over the last 12 months. Given the growth trend of that 5 years, that approx. $2B of income is likely to double by the end of this year.
Add to that the space launch business around Falcon 9, which had 40+ commercial launches that generated about $4B revenue and something close to $3B of income, and SpaceX was looking strong.
Again, SpaceX isn't what it was 6 months ago, before all the xAI fuckery, but the core business, Starlink and space launch, are doing well by themselves.
Is it really owned by them if Elon retains most of the voting rights anyway?
Look at Tesla and their hard pivot to humanoid robots. He is all in on robots which about a dozen other companies already make and are largely unprofitable in making. He is betting AI rapidly improves in a way that allows robots to become rapidly more useful and there is zero evidence that is feasible in the next 5 - 10 years.
Owned by various folks. Controlled by Elon. Granted, I don't know how Texas law deals with minority rights.
Amazon met profitability requirements and went into the SP500 at around $2.40 in November 2005. Two years before it was $2.70. Six Years before it was $4.40.
Two years _after_ listing it was $4.50. Six years after it was ~$10.
Waiting for profitability seems like it was a good bet.
That's one way to look at it. At a personal level, it's a small sliver and if it were to drop, its influence on your balance isn't much. So that's true.
Another way to look at it is that with ~200 million people owning index funds, all their funds balances together, even a tiny fraction of a percent is a massive amount of money being force-fed into spacex, which is to say, mostly into Elon's pocket (since he owns vast majority of the shares).
So why is it fair to change the rules to give this massive wealth transfer to Musk, who certainly does not need the extra money?
If it is not the end of the world, cover my losses.