Is it really passive index if S&P actively excludes Tesla?

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xraygoggles
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Is it really passive index if S&P actively excludes Tesla?

Post by xraygoggles »

Let me start by saying I'm a Tesla fanboy and own stock (and options). I also think it's inevitable that Tesla will be added to S&P at some point (although not today).

However, that got me thinking: let's say the S&P decides to not include it in their index at all for the rest of this year and maybe next year, for whatever reason(s) they decide on. Is that really passive indexing then?

Assuming it's market cap stays around 300-400B, how does one justify excluding one of the top 10 largest companies in the world (by market cap) in the index that includes the 500 largest US companies?! Seems like they would be actively choosing certain companies to leave out...
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MotoTrojan
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by MotoTrojan »

Nothing about the S&P500 says it holds the largest 500 companies.

https://www.spglobal.com/spdji/en/docum ... nload=true

But yes, I agree with you and was frankly quite surprised it didn't get in. I do think their earnings were suspect personally, but not sure it is up to them to judge that.
Last edited by MotoTrojan on Fri Sep 04, 2020 7:05 pm, edited 1 time in total.
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xraygoggles
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by xraygoggles »

MotoTrojan wrote: Fri Sep 04, 2020 7:02 pm Nothing about the S&P500 says it holds the largest 500 companies.
Oh, I see, guess I assumed incorrectly.

But my hypothetical point still stands: is there any other stock with a similar market cap that would not be included, if it didn't have the "baggage" that Tesla does?
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by bloom2708 »

If Tesla can meet the profitability criteria, they would likely be added. Until then, no S&P 500.

To be added to the S&P 500, the following criteria must be met:

It must be a U.S. company.
The market cap must be $5.3 billion or more.
The public float must consist of at least 50% of outstanding shares.
It must have positive reported earnings in the most recent quarter, as well as over the four most recent quarters.
The stock must have an active market and must trade for a reasonable share price.
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MotoTrojan
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by MotoTrojan »

bloom2708 wrote: Fri Sep 04, 2020 7:04 pm If Tesla can meet the profitability criteria, they would likely be added. Until then, no S&P 500.

To be added to the S&P 500, the following criteria must be met:

It must be a U.S. company.
The market cap must be $5.3 billion or more.
The public float must consist of at least 50% of outstanding shares.
It must have positive reported earnings in the most recent quarter, as well as over the four most recent quarters.
The stock must have an active market and must trade for a reasonable share price.
Tesla became eligible after their most recent earnings. It created a lot of buzz, so you must not follow Tesla too much. The fact they were not included while 3 S&P400 firms were was solely the decision of the committee.
MathWizard
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by MathWizard »

S&P 500 does not represent the total US market.

VTSAX is much closer, essentially mirroring the total US
stock market.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by bloom2708 »

MotoTrojan wrote: Fri Sep 04, 2020 7:06 pm
bloom2708 wrote: Fri Sep 04, 2020 7:04 pm If Tesla can meet the profitability criteria, they would likely be added. Until then, no S&P 500.

To be added to the S&P 500, the following criteria must be met:

It must be a U.S. company.
The market cap must be $5.3 billion or more.
The public float must consist of at least 50% of outstanding shares.
It must have positive reported earnings in the most recent quarter, as well as over the four most recent quarters.
The stock must have an active market and must trade for a reasonable share price.
Tesla became eligible after their most recent earnings. It created a lot of buzz, so you must not follow Tesla too much. The fact they were not included while 3 S&P400 firms were was solely the decision of the committee.
No I don't. So they have been profitable for the last 4 quarters? I'm sure they are in my Total US stock index. :D
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Afty »

This would be a good reason to hold a total stock market index fund, or if you already hold an S&P 500 fund in taxable, to add extended market to round it out.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by MotoTrojan »

bloom2708 wrote: Fri Sep 04, 2020 7:09 pm
MotoTrojan wrote: Fri Sep 04, 2020 7:06 pm
bloom2708 wrote: Fri Sep 04, 2020 7:04 pm If Tesla can meet the profitability criteria, they would likely be added. Until then, no S&P 500.

To be added to the S&P 500, the following criteria must be met:

It must be a U.S. company.
The market cap must be $5.3 billion or more.
The public float must consist of at least 50% of outstanding shares.
It must have positive reported earnings in the most recent quarter, as well as over the four most recent quarters.
The stock must have an active market and must trade for a reasonable share price.
Tesla became eligible after their most recent earnings. It created a lot of buzz, so you must not follow Tesla too much. The fact they were not included while 3 S&P400 firms were was solely the decision of the committee.
No I don't. So they have been profitable for the last 4 quarters? I'm sure they are in my Total US stock index. :D
Yup they met all of the eligibility requirements and were considered a sure thing for inclusion. Brutal :).

Yup they sure are in your Total US index; nice job seeing their promise and allocating to them ;).
lakpr
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by lakpr »

For what it is worth, TESLA is included in the Technology Index fund and Mega-Cap Index fund at Vanguard

https://advisors.vanguard.com/VGApp/iip ... ctedFunds=
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by snailderby »

It's fair to say the S&P 500 index is not a purely passive index. See https://www.indexologyblog.com/2014/08/ ... committee/. Even so, its performance generally tracks other large cap indexes pretty closely.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by TNWoods »

They meet the eligibility requirements, but that is just the first step.

With a P/E ratio over 1000 it is understandable that they were passed over.

Seriously, there is no justification for their valuation. None.

The very definition of irrational exuberance.

And they just announced they need to raise another 5 billion by diluting the stock? Come on.

I wish it would just crash down to a 35 P/E ratio and get it over with.

This market is looney toons right now.

TNWoods
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by petulant »

As someone with large holdings in S&P 500 index funds, I appreciate them not acting mechanically. I hope they wait out the wild rides.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Actin »

One of the requirements for being in the S&P is four profitable quarters, all of which Tesla only made money by selling tax credits. They only meet that requirement with a big asterisk next to it, which is probably the reason the committee passed. The company still loses money on every vehicle they sell.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Tamalak »

S&P isn't a passive index. I hold VTI instead of VOO for that reason. VTI and VOO are considered identical because their returns are identical. That trend will continue until it doesn't. I want to be in VTI at that point.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Oregano »

I think there is some confusion about the S&P 500 Index and passive investing. The index itself has never been intended to be passive or follow overly rigid inclusion rules. The passive part of it is the idea that since the active management is fairly light, investors like us may choose to buy and hold funds that mimic the index, at low cost, knowing that we will get returns similar to the overall stock market.

For many years, they did not allow holding companies in the index. Berkshire Hathaway was excluded based on that for a very long time. Then they changed their mind. But both before and after that decision, passively owning a low cost S&P 500 Index fund was a good idea.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by SB1234 »

Actin wrote: Fri Sep 04, 2020 7:24 pm.They only meet that requirement with a big asterisk next to it, which is probably the reason the committee passed.
I'm not advocating any side, but i think how a company makes money is not material.
anecdotes are not data
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Buy_N_Hold »

SB1234 wrote: Fri Sep 04, 2020 7:37 pm
Actin wrote: Fri Sep 04, 2020 7:24 pm.They only meet that requirement with a big asterisk next to it, which is probably the reason the committee passed.
I'm not advocating any side, but i think how a company makes money is not material.
It certainly seems material to me. There is a big difference between receiving government handouts and having profitable business operations. With a P/E above 1,200 recently, it was smart of the committee to pass. Only one way for the stock to go in the short run (down) and the millions of passive investors would get the short end of that deal.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by 000 »

petulant wrote: Fri Sep 04, 2020 7:21 pm As someone with large holdings in S&P 500 index funds, I appreciate them not acting mechanically. I hope they wait out the wild rides.
What if it keeps going up and the committee decides to buy in even higher?

The whole point of indexing is to avoid needing to make decisions such as this.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by dandinsac »

lakpr wrote: Fri Sep 04, 2020 7:12 pm For what it is worth, TESLA is included in the Technology Index fund and Mega-Cap Index fund at Vanguard

https://advisors.vanguard.com/VGApp/iip ... ctedFunds=
As of July 31, Tesla was #25 out of 8696 holdings in the Vanguard Total World Stock Index Fund Admiral Shares (VTWAX). One of the reasons that I moved my holdings to this fund was to simplify rebalancing and to make sure I owned at least some of the high flyers. As far as rebalancing goes, when all the stocks are in one fund, there’s not much to do for me.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by SB1234 »

Buy_N_Hold wrote: Fri Sep 04, 2020 8:04 pm
SB1234 wrote: Fri Sep 04, 2020 7:37 pm
Actin wrote: Fri Sep 04, 2020 7:24 pm.They only meet that requirement with a big asterisk next to it, which is probably the reason the committee passed.
I'm not advocating any side, but i think how a company makes money is not material.
It certainly seems material to me. There is a big difference between receiving government handouts and having profitable business operations. With a P/E above 1,200 recently, it was smart of the committee to pass. Only one way for the stock to go in the short run (down) and the millions of passive investors would get the short end of that deal.
You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
anecdotes are not data
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by TNWoods »

SB1234 wrote: Fri Sep 04, 2020 8:25 pm
Buy_N_Hold wrote: Fri Sep 04, 2020 8:04 pm
SB1234 wrote: Fri Sep 04, 2020 7:37 pm
Actin wrote: Fri Sep 04, 2020 7:24 pm.They only meet that requirement with a big asterisk next to it, which is probably the reason the committee passed.
I'm not advocating any side, but i think how a company makes money is not material.
It certainly seems material to me. There is a big difference between receiving government handouts and having profitable business operations. With a P/E above 1,200 recently, it was smart of the committee to pass. Only one way for the stock to go in the short run (down) and the millions of passive investors would get the short end of that deal.
You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
We do understand this one, and it is invalid, and it is material.

TNWoods
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by nisiprius »

The S&P 500 was created in 1957. It was stated to be an index of the stock of "leading companies in leading industries." Inclusion is somewhat subjective. As you might expect, "leading companies in leading industries" tend to be big companies. The S&P 500 is mostly large-cap companies and a few larger mid-caps. It can be said that it is a "large-company index" in the sense that the average company in it is large. However, it is not an index defined precisely by cap-weight.

This is partly because they wanted an index that could be calculated daily and in 1957 that was feasible for 500 stocks, but not the whole market. It is also partly because of fashion shifts. Before 1980 nobody was very interested in small-caps and the idea of a cutoff strictly on the basis of capitalization size wasn't a natural idea. That changed with the publication of an influential paper in 1980 that seemed to show impressively larger returns and risk-adjusted return for small-caps. It turned out to be partly spurious but it changed thinking, anyway.

People who want to attack indexing like to pretend that indexing means the S&P 500 index, and pounce on nitpicking issues. The most direct answer is to point out that Vanguard Total Stock Market Index Fund is about twice as large as the 500 Index Fund, the fund that is most commonly suggested in this forum is Total Stock, and that if anyone has any concerns about the S&P 500, fine, just invest in Total Stock instead.

Another good answer is that despite theoretical objections and complaints of front-running, etc. the observed fact is that the performance of the Vanguard S&P 500 fund has been virtually identical to that of the Vanguard Large-Cap Stock Index Fund, even though the latter is based strictly on capitalization, and even though the index is defined in such a way as to make front-running difficult. The S&P 500 is not a strictly mechanical index of the 500 largest companies but in the real world, based on observed performance, it might as well be.

In short, the S&P 500 is not perfectly passive, but pragmatically it doesn't matter--and if you think it does matter, then don't fret about it, ignore the S&P 500 and use a total or broad stock market index. They try to include virtually the whole stock market, already include Tesla and have for years. Good mutual funds and ETFs tracking them are available, not only from Vanguard but from Fidelity, Schwab, Blackrock iShares, etc.

If you have concerns about the S&P 500 don't waste a minute worrying, use a total or broad stock market index fund and relax.
Last edited by nisiprius on Fri Sep 04, 2020 8:41 pm, edited 2 times in total.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by SB1234 »

TNWoods wrote: Fri Sep 04, 2020 8:29 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm
Buy_N_Hold wrote: Fri Sep 04, 2020 8:04 pm
SB1234 wrote: Fri Sep 04, 2020 7:37 pm
Actin wrote: Fri Sep 04, 2020 7:24 pm.They only meet that requirement with a big asterisk next to it, which is probably the reason the committee passed.
I'm not advocating any side, but i think how a company makes money is not material.
It certainly seems material to me. There is a big difference between receiving government handouts and having profitable business operations. With a P/E above 1,200 recently, it was smart of the committee to pass. Only one way for the stock to go in the short run (down) and the millions of passive investors would get the short end of that deal.
You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
We do understand this one, and it is invalid, and it is material.

TNWoods
No way.
anecdotes are not data
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by nisiprius »

SB1234 wrote: Fri Sep 04, 2020 8:25 pm You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
OMG I am having a flashback to 1999, Wired magazine, the New Economy, and oldsters who just didn't "get" New Economy companies like Webvan, pets.com, boo.com, etc.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by SB1234 »

nisiprius wrote: Fri Sep 04, 2020 8:34 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
OMG I am having a flashback to 1999, Wired magazine, the New Economy, and oldsters who just didn't "get" New Economy companies like Webvan, pets.com, boo.com, etc.
Are you saying that how a company makes money is material?
anecdotes are not data
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by xraygoggles »

000 wrote: Fri Sep 04, 2020 8:12 pm
petulant wrote: Fri Sep 04, 2020 7:21 pm As someone with large holdings in S&P 500 index funds, I appreciate them not acting mechanically. I hope they wait out the wild rides.
What if it keeps going up and the committee decides to buy in even higher?

The whole point of indexing is to avoid needing to make decisions such as this.
Agree with above.

I would argue it's more likely (>50%; meaning in the range of 50.00001% to 99.99999%) that Tesla's stock will (at least) double in value within the next 5-10 years vs lose half its value. Of course, all the bears are on the opposite side.

But the point is, choosing to leave it out of the index when it is one of the most heavily traded stock/options and one of the biggest companies in the US is akin to actively picking winners & losers (vis-a-vis S&P inclusion, that is).
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by xraygoggles »

nisiprius wrote: Fri Sep 04, 2020 8:34 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
OMG I am having a flashback to 1999, Wired magazine, the New Economy, and oldsters who just didn't "get" New Economy companies like Webvan, pets.com, boo.com, etc.
You are seriously comparing Tesla to pets.com?
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by TNWoods »

SB1234 wrote: Fri Sep 04, 2020 8:33 pm
TNWoods wrote: Fri Sep 04, 2020 8:29 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm
Buy_N_Hold wrote: Fri Sep 04, 2020 8:04 pm
SB1234 wrote: Fri Sep 04, 2020 7:37 pm
I'm not advocating any side, but i think how a company makes money is not material.
It certainly seems material to me. There is a big difference between receiving government handouts and having profitable business operations. With a P/E above 1,200 recently, it was smart of the committee to pass. Only one way for the stock to go in the short run (down) and the millions of passive investors would get the short end of that deal.
You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
We do understand this one, and it is invalid, and it is material.

TNWoods
No way.
Yes way.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by SB1234 »

:beer
TNWoods wrote: Fri Sep 04, 2020 8:37 pm
SB1234 wrote: Fri Sep 04, 2020 8:33 pm
TNWoods wrote: Fri Sep 04, 2020 8:29 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm
Buy_N_Hold wrote: Fri Sep 04, 2020 8:04 pm

It certainly seems material to me. There is a big difference between receiving government handouts and having profitable business operations. With a P/E above 1,200 recently, it was smart of the committee to pass. Only one way for the stock to go in the short run (down) and the millions of passive investors would get the short end of that deal.
You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
We do understand this one, and it is invalid, and it is material.

TNWoods
No way.
Yes way.
Okay :beer :beer
anecdotes are not data
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Nate79 »

I think the committee just reminded the market that it is not completely rules based decisions and that front running it comes with peril.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by tibbitts »

000 wrote: Fri Sep 04, 2020 8:12 pm
petulant wrote: Fri Sep 04, 2020 7:21 pm As someone with large holdings in S&P 500 index funds, I appreciate them not acting mechanically. I hope they wait out the wild rides.
What if it keeps going up and the committee decides to buy in even higher?

The whole point of indexing is to avoid needing to make decisions such as this.
Yes, but an S&P500 Index fund itself is passive. The name S&P500 Index doesn't mean the S&P500 is a passive index; it means the fund is passively indexed to the S&P500.

I think most Bogleheads who advocate for the S&P500 (not me, incidentally) would argue that the reason they prefer it is that the S&P500 is not entirely passive. They believe, for whatever reason, that investing in "leading" companies is somehow safer/better/whatever than purely passive total market indexing.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by 000 »

tibbitts wrote: Fri Sep 04, 2020 8:49 pm
000 wrote: Fri Sep 04, 2020 8:12 pm
petulant wrote: Fri Sep 04, 2020 7:21 pm As someone with large holdings in S&P 500 index funds, I appreciate them not acting mechanically. I hope they wait out the wild rides.
What if it keeps going up and the committee decides to buy in even higher?

The whole point of indexing is to avoid needing to make decisions such as this.
Yes, but an S&P500 Index fund itself is passive. The name S&P500 Index doesn't mean the S&P500 is a passive index; it means the fund is passively indexed to the S&P500.
I think you just answered the OP's question :twisted:
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by JoMoney »

The methodology used to construct the S&P index is not what you think it is.
There have been lots of very large stocks excluded from the index.
In the early 1950's AT&T wasn't in the index, and would have been in the top spot comprising over 14%.
Berkshire Hathaway was excluded for decades until they merged with BNSF Railway.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by WoodSpinner »

SB1234 wrote: Fri Sep 04, 2020 8:35 pm
nisiprius wrote: Fri Sep 04, 2020 8:34 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
OMG I am having a flashback to 1999, Wired magazine, the New Economy, and oldsters who just didn't "get" New Economy companies like Webvan, pets.com, boo.com, etc.
Are you saying that how a company makes money is material?
Of course it’s material! Why would you think otherwise?

Lots of companies have cooked the books or taken advantage of one time financial loopholes to appear profitable.

Fortunately, I own VTI so I own a piece of Tesla. Just as fortunately, I don’t care if they are ever in the S&P 500.

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Re: Is it really passive index if S&P actively excludes Tesla?

Post by fm3040 »

Why should S&P include a company that has shown profits based on regulatory credits and trades at a totally unreasonable PE compared to its other constituents?

If not for regulatory credits, they would have posted a loss of over $300 MM last quarter.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Oregano »

It's pretty obvious that all of the people who are claiming that TSLA should be added to the S&P 500 Index and, if not, you just can't trust the S&P 500 Index, already own TSLA and just wanted another increase in stock price. It's clear that you don't want it to be added to the S&P 500 because you own the S&P 500, you want it be added to the S&P 500 so other investors have to bid up the price. The transparency of greed is not hard to see.
index245
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by index245 »

lakpr wrote: Fri Sep 04, 2020 7:12 pm For what it is worth, TESLA is included in the Technology Index fund and Mega-Cap Index fund at Vanguard

https://advisors.vanguard.com/VGApp/iip ... ctedFunds=
Tesla is also included in the Total World Stock index at Vanguard.
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Leif
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Leif »

I would think there is an oil company or two that Tesla could replace in the 500.
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JoMoney
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by JoMoney »

I noticed Vanguard's High Dividend Yield index fund claims it
https://investor.vanguard.com/etf/profile/VYM
... Follows a passively managed, full-replication approach.
And it doesn't have Tesla either :P
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SB1234
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by SB1234 »

WoodSpinner wrote: Fri Sep 04, 2020 9:05 pm
SB1234 wrote: Fri Sep 04, 2020 8:35 pm
nisiprius wrote: Fri Sep 04, 2020 8:34 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
OMG I am having a flashback to 1999, Wired magazine, the New Economy, and oldsters who just didn't "get" New Economy companies like Webvan, pets.com, boo.com, etc.
Are you saying that how a company makes money is material?
Of course it’s material! Why would you think otherwise?

Lots of companies have cooked the books or taken advantage of one time financial loopholes to appear profitable.

Fortunately, I own VTI so I own a piece of Tesla. Just as fortunately, I don’t care if they are ever in the S&P 500.

WoodSpinner
In the land of 'nobody knows nothing', saying that it is somehow relevant how a business makes profits is tantamount to saying "i know something". Once you are okay to believe that you can somehow know better than the market there is really nothing between that position and some other talking heads position that this metric or that metric is also important.

The only position consistent with 'nobody knows nothing' is just that. Nothing else.

In this case how would you know that financial loopholes were used, or that they were one time.
anecdotes are not data
harikaried
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by harikaried »

xraygoggles wrote: Fri Sep 04, 2020 7:01 pmSeems like they would be actively choosing certain companies to leave out...
What makes you think Tesla is actively excluded vs still going through the process of getting added? The normal quarterly rebalancing process seems to be relatively straightforward where in this case, the 3 smallest companies of S&P 500 swapped with the 3 largest companies of S&P 400. These changes happen regularly and probably have a streamlined process with easy approval.

At least looking at IVOO which tracks S&P 400, here's Vanguard's top 5 weighting from July 31st:
Teradyne Inc. $18,117,327
Catalent Inc. $17,452,978
Etsy Inc. $17,260,633
FactSet Research Systems Inc. $16,110,915
Fair Isaac Corp. $15,649,657
https://investor.vanguard.com/etf/profi ... o-holdings

And here's the bottom 5 weighting for S&P 500 VOO (excluding some seemingly remnant shares):
Coty Inc. Class A $22,766,790
H&R Block Inc. $57,696,544
Gap Inc. $58,609,494
Kohl's Corp. $62,061,128
Xerox Holdings Corp. $62,687,034
https://investor.vanguard.com/etf/profi ... o-holdings

Where Gap has gone up about 30% and Kohl's 12% in the past month, so the latter got bumped down. Not sure which date the market caps were checked, but it definitely looks like a "simple" comparison of the lowest market caps in S&P 500 and highest market caps in S&P 400.
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Steve Reading
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Steve Reading »

Buy_N_Hold wrote: Fri Sep 04, 2020 8:04 pm
SB1234 wrote: Fri Sep 04, 2020 7:37 pm
Actin wrote: Fri Sep 04, 2020 7:24 pm.They only meet that requirement with a big asterisk next to it, which is probably the reason the committee passed.
I'm not advocating any side, but i think how a company makes money is not material.
It certainly seems material to me. There is a big difference between receiving government handouts and having profitable business operations. With a P/E above 1,200 recently, it was smart of the committee to pass. Only one way for the stock to go in the short run (down) and the millions of passive investors would get the short end of that deal.
I agree it is material for the committee. The entire point of the 4-quarter requirement seems to be to ensure you are a continuously profitable enterprise. Depending on how the profits were obtained, I could see the committee agreeing or disagreeing that the spirit of this requirement is being met.

With that said, I don't know what government handouts you're talking about. Tesla turned a profit via selling tax credits to other automakers that would otherwise have to pay fines for compliance. In my mind, Tesla is effectively providing a service to these firms. If you think about it, it's not much different than a small business hiring a lawyer, or outsourcing some labor, to ensure the business stays in compliance and avoids government fines.

If I had to guess, the committee didn't include it due to the extreme volatility and speculation inherent in the firm, not because the profitability has some kind of asterisk (which I personally don't think it does). I wouldn't be surprised if Tesla does get included soon (in a few months say), despite the fact that every profitable quarter has been due to the tax credit selling.
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Northern Flicker
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Northern Flicker »

Market cap is not the only inclusion criterion for the S&P500. Market cap is the criterion for CRSP indices, so Tesla is in the CRSP large-cap index. VLCAX/VV is an index fund that tracks that index. Tesla is also in the Russell 1000 as well as total market indices. I think S&P tries to foster orderly index changes, so perhaps a heightened volume of call options or trading activity at some point in time might lead them to bide their time a little, not sure.
Risk is not a guarantor of return.
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PicassoSparks
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by PicassoSparks »

It is one of the great ironies of life that the S&P 500, the poster child for passive investing, is an actively managed index.
JBTX
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by JBTX »

I had no idea that was how S&p 500 worked. I assumed it was purely based on market weightings.

I always that passive meant that you essentially tracked an Index, or an equivalent. I didn't think passive meant you have to be market weight. I thought an investment in an equal weighted index was passive investing.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Northern Flicker »

PicassoSparks wrote: Sat Sep 05, 2020 1:22 am It is one of the great ironies of life that the S&P 500, the poster child for passive investing, is an actively managed index.
I would call that an exaggeration. It is FAR more passive than it is active. They consider profitability, liquidity, and overall industry sector balance when deciding on index changes, which generally have a very minimal impact on return, Tesla may end up being an exception. But the S&P500 was not originally created for index funds to track it.
Risk is not a guarantor of return.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by student »

xraygoggles wrote: Fri Sep 04, 2020 7:04 pm
MotoTrojan wrote: Fri Sep 04, 2020 7:02 pm Nothing about the S&P500 says it holds the largest 500 companies.
Oh, I see, guess I assumed incorrectly.

But my hypothetical point still stands: is there any other stock with a similar market cap that would not be included, if it didn't have the "baggage" that Tesla does?
Berkshire Hathaway only recently joined S&P 500. https://www.reuters.com/article/us-berk ... OO20100126 I think they resisted adding it due to its stock price.
whereskyle
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by whereskyle »

xraygoggles wrote: Fri Sep 04, 2020 7:01 pm Let me start by saying I'm a Tesla fanboy and own stock (and options). I also think it's inevitable that Tesla will be added to S&P at some point (although not today).

However, that got me thinking: let's say the S&P decides to not include it in their index at all for the rest of this year and maybe next year, for whatever reason(s) they decide on. Is that really passive indexing then?

Assuming it's market cap stays around 300-400B, how does one justify excluding one of the top 10 largest companies in the world (by market cap) in the index that includes the 500 largest US companies?! Seems like they would be actively choosing certain companies to leave out...
Every index is "actively managed." They kicked Google and Facebook out of the tech index in 2018. So much for however many dollars one had invested in those companies.

Buy total-market index funds.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
columbia
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by columbia »

TNWoods wrote: Fri Sep 04, 2020 7:20 pm They meet the eligibility requirements, but that is just the first step.

With a P/E ratio over 1000 it is understandable that they were passed over.

Seriously, there is no justification for their valuation. None.

The very definition of irrational exuberance.

And they just announced they need to raise another 5 billion by diluting the stock? Come on.

I wish it would just crash down to a 35 P/E ratio and get it over with.

This market is looney toons right now.

TNWoods
When has the market been rational?
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