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I never thought about how a stock ends up on the Index before! Apparently it's by committee: https://en.wikipedia.org/wiki/S%26P_500_Index#Selection_criteria h

I never thought about how a stock ends up on the Index before! Apparently it's by committee: https://en.wikipedia.org/wiki/S%26P_500_Index#Selection_criteria https://en.wikipedia.org/wiki/S%26P_500_Index#Selection_crit... "When considering the eligibility of a new addition, the committee assesses the company's merit using eight primary criteria: market capitalization, liquidity, domicile, public float, Global Industry Classification Standard and representation of the industries in the economy of the United States, financial viability, length of time publicly traded, and stock exchange."

CydeWeys 6y ago
I guess there's still some "active" even in "passive" investing; it's just the market index managers making the determinations rather than a fund manager.
- jdc 6y ago
  Well at least there's still the Russell 3000!
  - drocer88 6y ago
    Russell is clamping down on multi-class shares, too: https://research.ftserussell.com/products/downloads/FTSE_Russell_Voting_Rights_Consultation_Next_Steps.pdf https://research.ftserussell.com/products/downloads/FTSE_Rus... "Going forward, eligible companies need to have at least 5% of voting rights held by the public. Companies with multiple share classes already in one of the indices will have until September 2022 to change their structures or face removal." ( https://www.dividend.com/news/2017/11/03/companies-multiple-share-class-structures-cannot-be-part-sp-500/ https://www.dividend.com/news/2017/11/03/companies-multiple-... ). Same link as before.
    - 0xffff2 6y ago
      Do I not understand what "voting rights" means in this context? Doesn't this leave the door open for a CEO to retain 95% of voting stock, when all they need to maintain control is 50% + 1 share?
- awinder 6y ago
  I suppose you could look at it that way, although this case it’s the market that made the decision (s&p 500) which then trickled down to the index. You could use an index like CRSP US Total Market which didn’t have this issue. The index reflects reality, not so much impacted it
  - CydeWeys 6y ago
    The S&P 500 isn't "the market"; it's an index. The actual market is very clearly arguing for the inclusion of Tesla given how it's valued so highly over the vast majority of the stock that the index managers have included in the S&P 500. The S&P 500 purports to be representative of the 500 largest public US corporations, and by excluding Tesla they are absolutely failing to do so. When I buy A&P 500 tracking index funds I am not expecting that the index managers themselves are arbitrarily excluding companies that meet the qualifications. From the S&P's own literature: > To be eligible for S&P 500 index inclusion, a company should be a U.S. company, have a market capitalization of at least USD 8.2 billion, be highly liquid, have a public float of at least 50% of its shares outstanding, and its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive. Tesla meets all of these qualifications as near as I can tell. It blows the market cap requirement out of the water and has been profitable for the trailing 4 consecutive quarters.
    - robjan 6y ago
      Tesla has multiple share classes which is an exclusion criteria.
      - CydeWeys 6y ago
        Maybe this will be the push for Tesla to fix it then. In the mean time, I would love the option of an index that is literally just "the largest companies", without all these exclusion criteria. I wonder how it would fare against indexes with lots of exclusion criteria.
OJFord 6y ago
Note that indices differ in this regard, the FTSE100 (350) for example is simply the 100 (resp. 350, the 250 being the set difference) largest listed by market cap (determined quarterly - or the bottom couple would be quite volatile).
drocer88 6y ago
Actual reason is Tesla has multiple class shares: https://www.dividend.com/news/2017/11/03/companies-multiple-share-class-structures-cannot-be-part-sp-500/ https://www.dividend.com/news/2017/11/03/companies-multiple-... "On July 31 [2017], S&P Dow Jones Indices, the outfit that oversees the S&P 500 and its constituency, announced that it would take steps to exclude companies with multiple share class structures. ... The move comes amid blowback from investors who have complained about company practices that are designed to keep majority, or total, voting control in the hands of its management and founders"
- SoylentOrange 6y ago
  This is very interesting. However, it doesn't appear this rule is applied consistently as Facebook is in the S&P500 and is probably the most infamous example of a multi-class share structure.
  - jcranmer 6y ago
    Facebook is grandfathered in, having been added in 2013. Although the linked article says the following: > Companies with multiple share classes already in one of the indices will have until September 2022 to change their structures or face removal.
    - andrewla 6y ago
      That's not S&P -- that's FTSE Russell [1]: > For existing constituents, the rule will apply with effect from September 2022, thus affording a five year grandfathering period to allow constituent companies to change their capital structure if they so wish. From my reading, S&P has not yet announced a similar policy. [1] https://research.ftserussell.com/products/downloads/FTSE_Russell_Voting_Rights_Consultation_Next_Steps.pdf https://research.ftserussell.com/products/downloads/FTSE_Rus...
  - drocer88 6y ago
    Facebook joined in 2013. Social Media Valley companies already in the S&P 500 were allowed to remain.
throw0101a 6y ago
Good hour-long interview on someone that was (at the time) on that committee: > Today on the Rational Reminder Podcast we have joining us Dr. David Blitzer who is the Managing Director and Chairman of the S&P Dow Jones index committee. He has been there from the time when indexes were barely even being traded and the first time S&P Futures began trading, and since then, indexing has turned into the massive phenomenon we all know today. Indeed, S&P indexes were (and still is) at the center of this explosion. Today Dr. Blitzer talks to us about the early days of indexing and shares some of his ideas about why indexing became so popular. We also discuss the possible reasons why some people still choose actively managed funds and the effect that the abundance of research has had on their dwindling appeal. Ever wondered where the rapid growth in indexing will end up? What happens after indexing? Can indexing become too big? Be sure to join us for this masterclass on indexing! * https://rationalreminder.ca/podcast/54 https://rationalreminder.ca/podcast/54 * https://www.youtube.com/watch?v=LQbA_vBleU8 https://www.youtube.com/watch?v=LQbA_vBleU8 > David M. Blitzer is the former chairman of S&P Dow Jones Indices, where he was head of the index committee that determines which stocks are added to the S&P 500 Index, the Dow Jones Industrial Average, and all other stock market indices calculated by the company.[1] He held overall responsibility for index security selection, as well as index analysis and management.[2] * https://en.wikipedia.org/wiki/David_M._Blitzer https://en.wikipedia.org/wiki/David_M._Blitzer

CydeWeys 6y ago

I guess there's still some "active" even in "passive" investing; it's just the market index managers making the determinations rather than a fund manager.

jdc 6y ago
Well at least there's still the Russell 3000!
- drocer88 6y ago
  Russell is clamping down on multi-class shares, too: https://research.ftserussell.com/products/downloads/FTSE_Russell_Voting_Rights_Consultation_Next_Steps.pdf https://research.ftserussell.com/products/downloads/FTSE_Rus... "Going forward, eligible companies need to have at least 5% of voting rights held by the public. Companies with multiple share classes already in one of the indices will have until September 2022 to change their structures or face removal." ( https://www.dividend.com/news/2017/11/03/companies-multiple-share-class-structures-cannot-be-part-sp-500/ https://www.dividend.com/news/2017/11/03/companies-multiple-... ). Same link as before.
  - 0xffff2 6y ago
    Do I not understand what "voting rights" means in this context? Doesn't this leave the door open for a CEO to retain 95% of voting stock, when all they need to maintain control is 50% + 1 share?
awinder 6y ago
I suppose you could look at it that way, although this case it’s the market that made the decision (s&p 500) which then trickled down to the index. You could use an index like CRSP US Total Market which didn’t have this issue. The index reflects reality, not so much impacted it
- CydeWeys 6y ago
  The S&P 500 isn't "the market"; it's an index. The actual market is very clearly arguing for the inclusion of Tesla given how it's valued so highly over the vast majority of the stock that the index managers have included in the S&P 500. The S&P 500 purports to be representative of the 500 largest public US corporations, and by excluding Tesla they are absolutely failing to do so. When I buy A&P 500 tracking index funds I am not expecting that the index managers themselves are arbitrarily excluding companies that meet the qualifications. From the S&P's own literature: > To be eligible for S&P 500 index inclusion, a company should be a U.S. company, have a market capitalization of at least USD 8.2 billion, be highly liquid, have a public float of at least 50% of its shares outstanding, and its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive. Tesla meets all of these qualifications as near as I can tell. It blows the market cap requirement out of the water and has been profitable for the trailing 4 consecutive quarters.
  - robjan 6y ago
    Tesla has multiple share classes which is an exclusion criteria.
    - CydeWeys 6y ago
      Maybe this will be the push for Tesla to fix it then. In the mean time, I would love the option of an index that is literally just "the largest companies", without all these exclusion criteria. I wonder how it would fare against indexes with lots of exclusion criteria.

OJFord 6y ago

Note that indices differ in this regard, the FTSE100 (350) for example is simply the 100 (resp. 350, the 250 being the set difference) largest listed by market cap (determined quarterly - or the bottom couple would be quite volatile).

drocer88 6y ago

Actual reason is Tesla has multiple class shares: https://www.dividend.com/news/2017/11/03/companies-multiple-share-class-structures-cannot-be-part-sp-500/ https://www.dividend.com/news/2017/11/03/companies-multiple-... "On July 31 [2017], S&P Dow Jones Indices, the outfit that oversees the S&P 500 and its constituency, announced that it would take steps to exclude companies with multiple share class structures. ... The move comes amid blowback from investors who have complained about company practices that are designed to keep majority, or total, voting control in the hands of its management and founders"

SoylentOrange 6y ago
This is very interesting. However, it doesn't appear this rule is applied consistently as Facebook is in the S&P500 and is probably the most infamous example of a multi-class share structure.
- jcranmer 6y ago
  Facebook is grandfathered in, having been added in 2013. Although the linked article says the following: > Companies with multiple share classes already in one of the indices will have until September 2022 to change their structures or face removal.
  - andrewla 6y ago
    That's not S&P -- that's FTSE Russell [1]: > For existing constituents, the rule will apply with effect from September 2022, thus affording a five year grandfathering period to allow constituent companies to change their capital structure if they so wish. From my reading, S&P has not yet announced a similar policy. [1] https://research.ftserussell.com/products/downloads/FTSE_Russell_Voting_Rights_Consultation_Next_Steps.pdf https://research.ftserussell.com/products/downloads/FTSE_Rus...
- drocer88 6y ago
  Facebook joined in 2013. Social Media Valley companies already in the S&P 500 were allowed to remain.

throw0101a 6y ago

Good hour-long interview on someone that was (at the time) on that committee: > Today on the Rational Reminder Podcast we have joining us Dr. David Blitzer who is the Managing Director and Chairman of the S&P Dow Jones index committee. He has been there from the time when indexes were barely even being traded and the first time S&P Futures began trading, and since then, indexing has turned into the massive phenomenon we all know today. Indeed, S&P indexes were (and still is) at the center of this explosion. Today Dr. Blitzer talks to us about the early days of indexing and shares some of his ideas about why indexing became so popular. We also discuss the possible reasons why some people still choose actively managed funds and the effect that the abundance of research has had on their dwindling appeal. Ever wondered where the rapid growth in indexing will end up? What happens after indexing? Can indexing become too big? Be sure to join us for this masterclass on indexing! * https://rationalreminder.ca/podcast/54 https://rationalreminder.ca/podcast/54 * https://www.youtube.com/watch?v=LQbA_vBleU8 https://www.youtube.com/watch?v=LQbA_vBleU8 > David M. Blitzer is the former chairman of S&P Dow Jones Indices, where he was head of the index committee that determines which stocks are added to the S&P 500 Index, the Dow Jones Industrial Average, and all other stock market indices calculated by the company.[1] He held overall responsibility for index security selection, as well as index analysis and management.[2] * https://en.wikipedia.org/wiki/David_M._Blitzer https://en.wikipedia.org/wiki/David_M._Blitzer