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Part of the story is how passive index ETFs work. https://www.etf.com/stock/NKLA https://www.etf.com/stock/NKLA sort by # shares owned, you'll see the biggest o

by tony69 3y ago

Part of the story is how passive index ETFs work. https://www.etf.com/stock/NKLA https://www.etf.com/stock/NKLA sort by # shares owned, you'll see the biggest owners of NKLA stock are ishares funds, vanguard etc. These funds buy based on market cap of the stock. Anyone with a retirement account that holds passive etfs (or things like target date retirement funds) is a stockholder in NKLA, a stock which no active fund manager would touch with a 10foot pole. As passive accounts for more than half of the total market funds/flows, blatant frauds that somehow manage to be included in these funds have an easier time surviving (and the larger the market cap, the more inflows their shares receive). In the 2021 stock mania there were other factors at play too.

hunter2_ 3y ago
Are these ETFs, target date retirement funds, etc. protected against class action lawsuits from shareholders who end up holding the bag due to the inclusion of fraudulent stocks like this? Obviously waivers are signed about how performance is never guaranteed, but that's a bit different from a need to timely exit positions in fraudulent companies.
- zozbot234 3y ago
  The whole point of passive investing is to not pick winners and losers, to leave that part of the job to professional speculators (including, yes, short sellers). Because you aren't going to do any better than them on average, even if they do on occasion pick some duds (like Nikola).
  - bsdpufferfish 3y ago
    Imagine you invested in the index minus Nikola. This isn't improbable as several hours of due diligence would have raised concerns. This shows that the choice of stocks included in an index is not arbitrary. You don't get "better on average" automatically just by buying the 500 stocks on a list someone sold to you.
    - sgerenser 3y ago
      The share of Nikola in a total-market index fund was so tiny as to be negligble. If one person invested $100K in a total market fund, and another put together thier own "total market minus nikola" fund, even with zero trading fees, the latter might be up maybe $10 or so over the former. After fees and slippage, they're almost certainly behind.
  - hunter2_ 3y ago
    Sure, but I'm talking about when the professionals that you leave it to end up being negligent. Picking a dud occasionally isn't negligent, but I'm wondering if continuing to hold something fraudulent longer than reasonably necessary to ingest damning evidence and dump it might be.
    - balderdash 3y ago
      This might be the case if you paid a professional manager to actively manage a portfolio - but not when you are paying the manager to track an index.
peteradio 3y ago
SPACs are such an obvious joke on the stock system.
dpflan 3y ago
This is quite fascinating. I hope you are able to provide more details on the machinations of these funds. I see the largest allocation is "Direxion Moonshot Innovators ETF" [1], [2]. What money is flowing into this? Why is "Direxion Moonshot Innovators ETF" owned by anyone? For moments like this, I suspect this fund will liquidate its position? But I'm sure the market for NKLA shares is not that hot... [1] https://www.etf.com/stock/NKLA https://www.etf.com/stock/NKLA [2] https://www.direxion.com/product/moonshot-innovators-etf https://www.direxion.com/product/moonshot-innovators-etf
- fsckboy 3y ago
  >>These funds buy based on market cap of the stock. > I hope you are able to provide more details on the machinations of these funds. there are no machinations, it's mechanical, it's betting on expected value while diversifying risk/standard deviation.
  - lazide 3y ago
    Nope - even boring S&P 500 index funds have analysis at their heart. That qualifies those stocks for the S&P 500. Daily rebalancing is mechanical, and the criteria is coarse- but a decision was made and analysis is done.
    - lokar 3y ago
      And the fund managers do have some small discretion to deviate from the index they track
    - tony69 3y ago
      There is no analysis done to be included in the S&P500. It's 100% rules based. It's extremely unlikely that a stock like NKLA would ever qualify for the S&P500 but it was included in the Russel 2000 (also rules based), and by definition in any total stock market index fund.
      - lazide 3y ago
sillyinseattle 3y ago
> Anyone with a retirement account that holds passive etfs This is incorrect. Not all ETFs. These funds are sector focused (vehicles). A regular S&P500 ETF will not hold NKLA.
- tony69 3y ago
  I was trying to be brief but you are correct. NKLA was not in the SP500, but it was in the Russel 2000. Also, target retirement date funds will hold total stock market index funds, which will contain NKLA. Look: https://money.cnn.com/quote/shareholders/shareholders.html?symb=NKLA&subView=institutional https://money.cnn.com/quote/shareholders/shareholders.html?s... Top ten holders are Vanguard, Blackrock, & the other usual providers of index ETFs.
fsckboy 3y ago
>These funds buy based on market cap of the stock. There might potentially be a problem if ETFs owned the entire market, but owning half the market cap still allows for market pricing of the other half. I don't see that you are pointing out a problem? The market put a price on NKLA, and you are simply claiming that you know better than the market (to hell with the wisdom of crowds); such beliefs are generally unfounded. One example does not tell a convincing story, do you have a portfolio of disbelief that you have tracked the performance of?
- tony69 3y ago
  You don't need to be at the limit case of 100% of the market owned by passive funds to start creating problems [1]. Still, my point was that passive EFTs create a constant bid on company shares, disregarding any fundamentals. The speculative mania of 2021 artificially inflated the market cap of many SPACs like NKLA - speculators have all the rights to do this, but passive ETFs will blindly follow and increase their allocation based on market cap (the effect goes both ways, as price goes down allocation decreases). Who has been buying NKLA shares? Vanguard, for one: look at fund flows since 2021, mostly positive https://etfdb.com/etf/VTI/#fund-flows https://etfdb.com/etf/VTI/#fund-flows most of those inflows result in purchases of NKLA shares. [1] https://www.acheroninsights.com/blog/wbdvi4uarbd3hdssx3f5kaffkz6q28 https://www.acheroninsights.com/blog/wbdvi4uarbd3hdssx3f5kaf...

by tony69 3y ago

hunter2_ 3y ago

Are these ETFs, target date retirement funds, etc. protected against class action lawsuits from shareholders who end up holding the bag due to the inclusion of fraudulent stocks like this? Obviously waivers are signed about how performance is never guaranteed, but that's a bit different from a need to timely exit positions in fraudulent companies.

zozbot234 3y ago
The whole point of passive investing is to not pick winners and losers, to leave that part of the job to professional speculators (including, yes, short sellers). Because you aren't going to do any better than them on average, even if they do on occasion pick some duds (like Nikola).
- bsdpufferfish 3y ago
  Imagine you invested in the index minus Nikola. This isn't improbable as several hours of due diligence would have raised concerns. This shows that the choice of stocks included in an index is not arbitrary. You don't get "better on average" automatically just by buying the 500 stocks on a list someone sold to you.
  - sgerenser 3y ago
    The share of Nikola in a total-market index fund was so tiny as to be negligble. If one person invested $100K in a total market fund, and another put together thier own "total market minus nikola" fund, even with zero trading fees, the latter might be up maybe $10 or so over the former. After fees and slippage, they're almost certainly behind.
- hunter2_ 3y ago
  Sure, but I'm talking about when the professionals that you leave it to end up being negligent. Picking a dud occasionally isn't negligent, but I'm wondering if continuing to hold something fraudulent longer than reasonably necessary to ingest damning evidence and dump it might be.
  - balderdash 3y ago
    This might be the case if you paid a professional manager to actively manage a portfolio - but not when you are paying the manager to track an index.

peteradio 3y ago

SPACs are such an obvious joke on the stock system.

dpflan 3y ago

This is quite fascinating. I hope you are able to provide more details on the machinations of these funds. I see the largest allocation is "Direxion Moonshot Innovators ETF" [1], [2]. What money is flowing into this? Why is "Direxion Moonshot Innovators ETF" owned by anyone? For moments like this, I suspect this fund will liquidate its position? But I'm sure the market for NKLA shares is not that hot... [1] https://www.etf.com/stock/NKLA https://www.etf.com/stock/NKLA [2] https://www.direxion.com/product/moonshot-innovators-etf https://www.direxion.com/product/moonshot-innovators-etf

fsckboy 3y ago
>>These funds buy based on market cap of the stock. > I hope you are able to provide more details on the machinations of these funds. there are no machinations, it's mechanical, it's betting on expected value while diversifying risk/standard deviation.
- lazide 3y ago
  Nope - even boring S&P 500 index funds have analysis at their heart. That qualifies those stocks for the S&P 500. Daily rebalancing is mechanical, and the criteria is coarse- but a decision was made and analysis is done.
  - lokar 3y ago
    And the fund managers do have some small discretion to deviate from the index they track
  - tony69 3y ago
    There is no analysis done to be included in the S&P500. It's 100% rules based. It's extremely unlikely that a stock like NKLA would ever qualify for the S&P500 but it was included in the Russel 2000 (also rules based), and by definition in any total stock market index fund.
    - lazide 3y ago

sillyinseattle 3y ago

> Anyone with a retirement account that holds passive etfs This is incorrect. Not all ETFs. These funds are sector focused (vehicles). A regular S&P500 ETF will not hold NKLA.

tony69 3y ago
I was trying to be brief but you are correct. NKLA was not in the SP500, but it was in the Russel 2000. Also, target retirement date funds will hold total stock market index funds, which will contain NKLA. Look: https://money.cnn.com/quote/shareholders/shareholders.html?symb=NKLA&subView=institutional https://money.cnn.com/quote/shareholders/shareholders.html?s... Top ten holders are Vanguard, Blackrock, & the other usual providers of index ETFs.

fsckboy 3y ago

>These funds buy based on market cap of the stock. There might potentially be a problem if ETFs owned the entire market, but owning half the market cap still allows for market pricing of the other half. I don't see that you are pointing out a problem? The market put a price on NKLA, and you are simply claiming that you know better than the market (to hell with the wisdom of crowds); such beliefs are generally unfounded. One example does not tell a convincing story, do you have a portfolio of disbelief that you have tracked the performance of?

tony69 3y ago
You don't need to be at the limit case of 100% of the market owned by passive funds to start creating problems [1]. Still, my point was that passive EFTs create a constant bid on company shares, disregarding any fundamentals. The speculative mania of 2021 artificially inflated the market cap of many SPACs like NKLA - speculators have all the rights to do this, but passive ETFs will blindly follow and increase their allocation based on market cap (the effect goes both ways, as price goes down allocation decreases). Who has been buying NKLA shares? Vanguard, for one: look at fund flows since 2021, mostly positive https://etfdb.com/etf/VTI/#fund-flows https://etfdb.com/etf/VTI/#fund-flows most of those inflows result in purchases of NKLA shares. [1] https://www.acheroninsights.com/blog/wbdvi4uarbd3hdssx3f5kaffkz6q28 https://www.acheroninsights.com/blog/wbdvi4uarbd3hdssx3f5kaf...