As SpaceX's much-anticipated IPO nears, investors rethink what "passive" investing really means. Many now realize "passive" doesn't mean hands-off,especially as major index providers tweak rules to possibly fast-track SpaceX into big stock indexes.
Passive investing usually means putting money into index funds or ETFs that track market indices like S&P 500. It's popular for low fees, simplicity. But it has a downside. No flexibility to dodge underperforming stocks that join the index.
Changes by Nasdaq and FTSE Russell to their methods could let SpaceX join key indexes sooner. If that happens, millions of passive funds tracking these indexes might have to buy SpaceX shares automatically. Some investors worry about losing control over such decisions.
But S&P Dow Jones Indices decided not to change its rules for S&P 500, showing variability in index construction . Each provider uses its own criteria for which companies get in,how much weight they have. These criteria can change, showing indexes are human-made, not fixed .
“Indexes are based on decisions made by people and organizations,” said Adriana Robertson,professor at University of Chicago Law School. “Different index providers can make different choices,leading to different outcomes for investors.”
Research shows S&P 500 had eight method changes between 2015-2018 . These tweaks show indexes aren't static; they're shaped by decision-makers . Big asset managers like Vanguard and BlackRock use these indexes to build their funds,which individual investors buy .
Interestingly,studies found index funds don't always perfectly mimic their indexes. A 2024 study by Robertson and Peter Molk from University of Florida found funds often have leeway in how closely they track benchmarks. For example, Fidelity’s S&P 500 fund may not always hold same stocks as S&P 500 index, while a Vanguard fund owned Berkshire Hathaway Class A shares,despite index using Class B .
Findings challenge idea that passive funds just mirror indexes. Despite controversies, passive investing's popularity is strong. Vanguard's S&P 500 ETF,VOO, recently topped $1 trillion in assets.
Experts say whether investors choose active management or index funds,they're still trusting others to manage their money. "Passive" is becoming more a marketing term than a precise description of funds. Robertson noted index funds offer big benefits, like diversification,low costs, but aren't free from human influence .
The upcoming SpaceX IPO reminds us passive investing isn't as automatic as it seems. Investors should know indexes they depend on change with human decision-making. Often takes someone like Elon Musk to spotlight passive investing's complexities for wider public…
