Benjamin Felix

But at the very least, we could say when they have low expected returns is when you get to buy.

And I would say those considerations are done to make the indexes replicable by index funds, but they're not done to give it better returns or anything like that.

It's just like, okay, we want this index to be a representation of the market, but we also want it to be investable.

Therefore, we're going to make sure stocks are liquid and whatever other criteria they choose to include in that specific index.

We kind of left off there with IPOs have low expected returns.

Companies go public when they think their stock price is high, when they can get a good valuation for their business, which means if you're investing in IPOs on the secondary market, you might expect low returns from those investments.

Index funds, just by nature of the reason that they exist, tend to invest in IPOs.

on the secondary market.

Although when we talked to Jim Rowley from Vanguard, they mentioned that they do try to get IPO allocations when possible, but even then Vanguard's not going to get a big enough IPO allocation to fill what they need in general for a newly listed company, just because their funds are so big.

I think in general, we can say index funds are buying these shares on the secondary market, which doesn't tend to look so good.

And again, we'll come back to those data in a minute.

So if you're an index fund investor, you probably don't love the idea of buying overpriced stocks, but index funds do it because they're representing the market.

They gobble up whatever gets included in the index regardless of its price.

The IPO inclusion rules do vary across indices.

This is important.

As of right now, as of the time of recording, the S&P 500 does require a stock to have been trading on a public exchange for 12 months before inclusion.

So as of right now, and this is one of the things there have been some rumblings about changing, although these are like unsubstantiated anonymous source type information.

But apparently S&P is considering changing their inclusion rules for some of these big IPOs.

But as of right now, factually, they do require 12 months of trading before inclusion.

So that's S&P 500, which is a subset of the S&P 1500 composite.