Index Funds Are Changing: Here’s What You Need to Know
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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.
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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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:05–1:19
2
What major changes are happening with index funds like the S&P 500 and Nasdaq 100?
1:19–4:46
3
How are upcoming IPOs from companies like SpaceX and OpenAI influencing index funds?
4:46–15:58
4
What does the term 'float' mean in relation to IPOs?
15:58–20:09
5
What historical context is relevant to understanding current IPO trends?
20:09–21:02
Speakers
2 identifiedMore from Friends That Invest
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