S&P 500 Index
The S&P 500 Index is one of the most popular Indices in the world. It represents over 26Trillion $s of market Cap as of this writing.
The S&P 500 Index tracks the performance of the 500 largest US based public companies.
Index Based Investing
I have been recommending Index Based Investing through low cost ETFs. This has been proven time and again to beat the smartest of Investors and Asset Managers over the long run.
Active Vs Passive
It is important to understand the two main styles of investing. Active and Passive. Active investing involves picking stocks through fundamental or technical research on individual stocks. This requires actively following the company through quarterly and annual reports and diligently analysing all the data and management decisions. It is tedious and expensive. The idea is that this money is well spent because that leads to higher returns.
The overwhelming data however does not support this point of view. In fact Passive investing has been able to beat most Actively Managed funds over the long run.
So what is Passive investing?
Passive Investing is investing based on rules instead of human judgement. Most Passive funds like the Vanguard or Fidelity Index ETFs follow the S&P 500, Nasdaq or other Indices. The reason being that the indices are built based on rules and also most Funds are benchmarked to these Indices.
So, by rule, these index funds may not beat the Index but will not underperform the index as they merely simulate the index based on the same rules of the Index.
For example, a S&P 500 Index ETF like the Vanguard VOO holds the same stocks in the same proportion as the S&P 500 Index.
Inclusion of Tesla
The inclusion criteria of the S&P 500 Index is very clear, the stocks have to be US listed and US domiciled. The company should have four consecutive quarters of cumulative profit. In addition the most recent quarter has to be profitable.
So, as long as a company meets all these criteria and in terms of the market capitalization is among the top 500 US companies then it should be included in the Index.
Tesla meets all these criteria and has been eligible based on these rules since the second quarter of 2020. In fact Tesla is easily among the 20 largest companies in the US.
The S&P 500 Active Mutual Fund
If the S&P 500 was impartial and a rule based entity then Tesla should have been included in the index. But, it seems that the process is less transparent than previously thought.
The decisions are based on a committee and the proceedings of this committee is held in secrecy. This makes the S&P 500 index no different than a secretive mutual fund or a Hedge Fund.
I believe that the delay in implementing a rule based system brings down the credibility of the Index. The S&P 500 index is used to build out over 3Trillion $ in Index ETFs and over 11Trillion $s in benchmarked Funds world-wide. I hope the Index committee wakes up to the seriousness of the matter and takes action to restore the credibility and the legitimacy of the Index.