Americans are starting to realize that “passive” investment funds aren’t actually that passive — and they have Elon Musk to thank for the lesson.
Why it matters: Ordinary people have trillions of dollars invested in broad-based index funds meant to be a low-cost way to basically buy stocks and chill
Catch up quick: As Musk’s SpaceX barrels toward its expected public market debut on Friday, things have been less than chill. – Two of the companies that manage big indexes, Nasdaq and FTSE Russell, changed their rules recently in a way that will fast-track SpaceX for inclusion. – That means that millions of passive investors — those who are in funds that track those indexes — will effectively have to buy SpaceX stock. Perhaps it’ll be a part of your 401(k). – Some aren’t happy about it. Yes, but: Last week, S&P Dow Jones Indices said it decided not to modify the rules for its flagship S&P 500.
The big picture: This was all a reminder that indexes like the Nasdaq 100 or the S&P 500 aren’t some kind of naturally occurring phenomena. – There are many different flavors of indexes governed by all sorts of subjective rules — made deliberately by human beings. Zoom in: From 2015 to 2018, the S&P 500 changed its methodology eight times, University of Chicago Law School professor Adriana Robertson noted in her 2019 paper, “Passive in Name Only. Delegated Management and ‘Index’ Investing.” “Don’t be confused about what these things are,” Robertson tells Axios. – It’s been sort of gratifying that people are waking up to this notion now, she says. “Index funds are the product of choices people make, and different index providers can make different choices.” How it works: Index companies like Nasdaq and S&P make a list of stocks and then weight them. – They come up with rules to decide how to do this.