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Comment by JumpCrisscross | Hacker News Reader

> I was planning to move to an equal weight index

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.

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The market may not have ever priced in a rebalancing of the S&P 500, but the S&P 500 also has never allowed entry of companies that may never become profitable.

> the S&P 500 also has never allowed entry of companies that may never become profitable

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.

> but the S&P 500 also has never allowed entry of companies that may never become profitable

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.

> 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.

They can certainly say they no longer track the 500 leading large-cap companies on the US exchanges.

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.

Read the quote you posted again

> The market, broadly, never priced in a rebalancing of the S&P 500

And if you had seen it what would have that pricing looked like?

> 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.

Again, what would it have looked like? What does “other components trade down in anticipation” mean when SPCX doesn’t even exist?

> What does “other components trade down in anticipation” mean when SPCX doesn’t even exist?

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.

You say you didn’t see it happening and I’m asking what would you have seen if you had seen it. What would have been different? Where would have you seen this pretrading that you didn’t see? Who is that someone that would have been selling those shares but didn’t?

Broad strokes, you would expect to see a withdrawal of funds from the market by anyone following equal weight funds. New entrant means you have to pull money out of existing stocks to re-allocate to the new entrant to maintain equal weights.

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 expect to see a withdrawal of funds from the market by anyone following equal weight funds

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.

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