Key Takeaways
- S&P Dow Jones Indices, the provider of benchmark indexes like the S&P 500, is mulling changes to its index methodology for mega-cap companies.
- Nasdaq has already rolled out a set of new rules, including one that could fast-track newly listed large-cap companies into its Nasdaq 100 index.
Everyone seems to want a piece of expected mega IPOs—including the providers of the indexes that power funds held by scores of investors.
With Elon Musk’s rocket company SpaceX and artificial intelligence startup Anthropic, whose private market valuations rival those of most stocks, among the big expected market debuts of the coming months, S&P Dow Jones Indices and Nasdaq (NDAQ) are making or mulling changes that could fast-track new stocks into benchmarks like S&P 500 and the Nasdaq 100. Nasdaq has rolled out “fast entry” rules that would make new mega-cap stocks—those with market values that would place them in the top 40 of the Nasdaq 100—eligible for inclusion after just 15 trading days; previously, it could take a year. S&P Dow Jones Indices, the provider behind the S&P 500, is also weighing changes to its inclusion criteria that could more quickly allow mega-cap companies into its indexes.
All this points to index providers’ desires to keep their products fresh in the eyes of investors amid quickly changing public markets, particularly at a time when the appetite for high-growth companies and tech shares is strong. However, some worry about the potential knock-on effects to benchmark indexes that are tied to trillions of dollars in mutual funds and ETFs sitting in investors’ retirement accounts and pensions. The Vanguard S&P 500 (VOO), the iShares Core S&P 500 (IVV), and the SPDR S&P 500 (SPY) ETFs, for example, collectively have about $2.5 trillion in assets under management.
“If the goal is to capture the largest market-cap stocks out there, this keeps the indexes more relevant,” said Rich Lee, Baird’s Head of Program Trading and Execution Strategy, in an interview with Investopedia. “The risk is that if a stock is fast-tracked, it may not get the time and proper vetting that an index provider would typically apply.”
WHY THIS MATTERS TO YOU
Many investors have their investment dollars in index funds tied to the S&P 500 and the Nasdaq. Some, but perhaps not all, may not necessarily want their retirement money in newly listed stocks, no matter how high their profile.
S&P Dow Jones Indices last week said in a proposal that it was consulting market participants about changing how mega-cap companies qualify into their indexes, defining “mega caps” as companies with market capitalizations equal to or greater than the 100th largest company in the S&P Total Market Index—which, at present, puts the threshold at around $110 billion.
Such companies would be eligible under the proposed rules, even if they don’t meet the S&P’s “financial viability” standards, which require a company to show positive GAAP net income over the most recent quarter and for the sum of the most recent four consecutive quarters.
Under the proposed change, if—for example—SpaceX or Anthropic were to fetch the trillion-dollar-plus valuations they reportedly seek, they’d qualify regardless of their financials. (SpaceX is said to have generated billions in profit last year, and Anthropic is reportedly on track to break even in 2028.) S&P Dow Jones Indices may also shorten the “seasoning period” for entry into some S&P indexes by half, to six months from 12, according to the index provider.
Even if the eligibility requirements were to change across index providers, that doesn’t automatically guarantee the likes of SpaceX or Anthropic a spot. That has flustered some traders at times when they’ve bid up shares of stocks expecting inclusion in an index based on their reading of the criteria—only to be disappointed.
“Index providers have criteria, but they also have the flexibility to decide,” Baird’s Lee said. “There is a subjective component to [the process].”