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Chapter 1: What is the main topic discussed in this episode?
Hello and welcome to Friends That Invest. You're joined by your host, Sim. I'm a financial author and investor, and I'm here to help you learn all things investing and personal finance. In this week's episode, we have a very exciting topic, which is what is going on with index funds. You are probably someone that likes to invest Keeps your money there. You're not too worried.
You're just dollar cost averaging and you're going on about your life because there are more important things than to worry about the composition of an index fund until today. News has come out.
that the index funds that we have come to know and love like the S&P 500 and the NASDAQ 100 are changing their rules just before the announcement of the IPOs that are coming up, including Elon Musk, SpaceX, Anthropic and OpenAI. So what does this mean for your portfolio? Should you be changing your index funds? Should you be worried? And overall, is this going to be an issue?
I'm going to break down exactly what this means, what you need to do, and if it's something that needs to be a concern or if we're just going to continue to invest like things are usual.
Chapter 2: What major changes are happening with index funds like the S&P 500 and Nasdaq 100?
So in chapter one, we're going to explain what is happening with SpaceX so far. If you have maybe not had the chance to look into it, that is totally normal. Like I said, most people are not like, hey, I wonder how close we are to Mars. I wonder how close Elon Musk is. Like, what is that rocket ship company that Elon Musk started? Where is that going? What's going on?
we're busy with other things. Life, life is getting busy. Some of us have kids. Some of us are trying to like get to grad school. Some of us are just like day-to-day slogging in our jobs or in our businesses. Like there are more important things going on. And saying that, SpaceX has decided that that they are going to have an IPO or a initial public offering on the 12th of June, 2026.
And they are going to issue what is considered a small number of shares, but what is also a large valuation. And so what I mean by that is SpaceX is going to issue 4.3% of its entire valuation. But the thing to note is that its entire valuation is $1.75 trillion. And so as a result, they are gonna issue 75 billion, not even million, $75 billion worth of shares to retail investors on their IPO.
And as a result, they want to make $75 billion to continue to fund the growth of SpaceX. Essentially, for investors that have been in the market for a while or understand the jargon behind it, this is quite a small float. A float is just a jargon term of saying how much of the company's entire shares are available for the retail market. So 4.3% is not a lot.
However, the issue that people have is not necessarily just the size of the float, but the fact that some of the index funds rules of funds that we have come to know and love like the NASDAQ 100 and the S&P 500 and a couple of other S&P indices are going to possibly change just before the IPO happens. And so now let's get into exactly what's going on here.
So in chapter two, in the past, what we have seen is that companies have decided, you know what? I want to IPO. I want to raise more money. Like, let's do this. And Amazon would be a good example. They IPO in like 1997. And they were like, this is, you know, this is working for us. This is what we're going to do. Let's IPO. Amazon was a small cap company back then.
Like it was around like $500 million, which is like now such an embarrassing number for them. But at the time, that's what they were at. When companies wanted to IPO to retail investors, they were growth stocks because, like I said, they were small. Amazon was only a small cap. It had room to grow to become a large cap or a mega large cap.
And so if you invested early or if you had Amazon stock in your index fund, there was room for it to grow even if it took a year before it came on the index. In fact, Amazon is a good example because it didn't make it onto the S&P 500 index fund until eight years after it IPO'd.
What that means is that even though it was on the share market for the first eight years, there was still so much room for the company's share price to increase that it didn't really matter that it wasn't there at the start.
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Chapter 3: How are upcoming IPOs from companies like SpaceX and OpenAI influencing index funds?
Now, the issue that we are running into nowadays is essentially an issue of too much money existing in the private market. So there's the public market where the S&P 500 is, where everyday retail investors invest. And for the most part, this is your everyday person that's putting money in, they're buying and holding, they're moving on with their lives, they have bigger and better things to do.
However, in private markets, like just think of yourself as the owner of SpaceX. We're not going to Elon Musk's mind. Let's just imagine like we're a different founder of SpaceX. And in 2026, you could IPO a company. But the reason why we IPO a company, remember, like, let's go back to Sims Lemonade Stand is because we need cash to fund the growth of our business.
Nowadays, because there is so much private wealth available, the net worth of the extremely wealthy has gotten so large. There is just so much like money lying around. Like when people say, oh, it's hard to get funding.
It's hard to get funding if you are a certain person that look a certain way, but it is not hard to get funding if you are also a different looking person with a different background or pedigree or you've come from high Harvard and you're 22 years old and you're like a boy with a hoodie and you have an idea and you can code. There is a lot of money available for that kind of person.
There is so much money available that it's not even the money that these companies are trying to decide on. It's who money is worth more to us. And so they might have like a venture fund be like, hey, we'd love to give you a million dollars. And they're like, yeah, well, it's just a million dollars.
Whereas A16Z, this more prestigious venture fund wants to give me a million dollars and access to its network of like past founders, which include, you know, Mark Zuckerberg or this and that. And therefore I'm going to go with that. Now the issue occurs, imagine you're SpaceX, you wanna raise more money.
You don't need to go and IPO and get like public cash because public cash comes with so much more regulation. If I am the owner of SpaceX,
every single quarter I have to release like a quarterly form the SEC has to like interrogate it and make sure that I'm not doing anything illegal I have to be so careful about like talking about my public shares with my friends and family I can't talk about like hey you know we have this new release coming out because then I might be Martha Stewart and end up in jail for like nine months for possibly insider trading like there are just so many more complications whereas a private company
is treated the exact same way as like a small cafe down the road. It's still just a private company. No one has to see their financials. No one is interrogating them outside of like the general law. And so it's, I guess it's just less headache in all honesty.
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Chapter 4: What does the term 'float' mean in relation to IPOs?
That is what happens. So the issue is if something like SpaceX gets added in earlier than it has needed to in the past, it means something has had to be booted out. And usually the thing that had to be booted out has been maybe a profitable company that actually did follow the rules and joined. So that's like not such a great thing to deal with.
Another con is that this means investing is not really as passive as we once thought it was. Like, yes, we understand that the S&P 500 is passive and it automatically adjusts. But there is also a board and a committee and decisions made about what can be let in and when. And so to know that the board and the committee are able to adjust things based on what they believe is the right thing to do.
And yes, they did. you know, consult with everyday investors and you could have actually like being one of the investors that submitted if you thought this was the right thing or not. There's an active element to it and it makes investors kind of feel like, huh, so it's not as passive as I truly wanted it to be. And that's, you know, not really what a lot of us signed up to.
Now the pros with this, one is that you do get access to these mega cap companies and therefore the growth of them without having to do anything. And so as a result, it's not going to be like 10% of your portfolio, at least with the NASDAQ version, the S&P version we'll see. But it's going to be a small percentage.
And it does mean that if it grows, we're still aiming for that same 7% return over the years. And so hopefully it allows investors to not have missed out on the gains that were seen like when Tesla IPO'd. I remember in like 2020, Tesla had IPO'd. So I had my Tesla shares and I also had my S&P 500 funds. And I remember my Tesla shares going up like 400%.
And though it was not in the S&P 500, because I had made exposure into that or taken exposure into that, I got the benefit. But then also, shouldn't investors get the chance to decide, hey, do I want to take that risk or do I not, as opposed to it automatically being added in? That's, you know, a concern.
Another pro though, which I'm okay with, is that if the company doesn't do as well, let's say SpaceX IPOs and it drops, then index funds are known, I mean, that's the whole passive part of it, they are known to rebalance regularly and so it will just drop further down on the list and you'll have less exposure to it or it will completely fall off the list if you're a company that's done really, really, really poorly.
So it still has that passive element to it in a way. I also just want to add one of the concerns, and I don't know the answer to this, so I don't really know what this will look like.
But one of the concerns investors have, myself included, is will these large companies just add to the magnificent seven and be huge movers of the market in the same way that, for example, Nvidia has, or in the same way that Meta used to, where the market moves slightly just because of a few big key moves. And because of the large market cap, is that going to happen?
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Chapter 5: What historical context is relevant to understanding current IPO trends?
I hope you enjoyed this episode. I hope you found it helpful to learn what has changed, the problem with private markets versus public markets and what's going on with SpaceX. And if you found this episode helpful, then please take a screenshot, put it on your Instagram story, tag friends that invest. It is the best way for us to grow the podcast and reach more people.
And what more can we ask for than more women that know about financial literacy and investing? So with that, I'll see you next week.
Disclaimer. Friends That Invest does not provide personalized investing advice for your individual needs. We are not financial advisors. The advice from Friends That Invest exists for educational purposes only and should not be relied upon to make an investment or financial decision. Advice from Friends That Invest is general in nature and does not consider individual circumstances.
Always do your research and due diligence.