In this episode of ThimbleberryU, we talk about what a giant IPO like SpaceX could mean for a personal investment portfolio. The conversation starts with common questions many investors ask when a major private company gets ready to go public. Am I missing out? Is my index fund going to own it? Am I exposed to something I do not understand?
Amy explains that many people assume an index fund owns the biggest companies in the market, but that is not always true. Index funds follow rules. For example, a company in the S&P 500 usually has to meet certain requirements around profitability, public trading shares, and time as a public company. So a company can be huge and still not appear in an index fund right away.
That distinction matters, but probably not as much as the headlines make it feel. For most investors, one company being absent from an index now or added later is a small part of a diversified portfolio. The bigger risk is behavioral. A headline can create fear of missing out, and that fear can push someone to chase a single hot stock. That reaction can do more damage than the index rules themselves.
Amy also explains where this can show up in real accounts. Broad index funds may be held in taxable brokerage accounts, 401(k)s, or IRAs. If those funds are designed to track an index, then the rules of that index shape what the investor actually owns. An index fund does not necessarily mean the investor owns everything. It means the investor owns what the index includes at that time.
The episode also explains the difference between active and passive investing. An active fund has a manager making ongoing decisions about what to buy and sell. A passive fund tracks an index mechanically. That does not mean no decisions were made. It means the decisions are built into the index rules rather than made day to day by a fund manager.
Amy thinks this is not a one-time issue. Large private companies have been staying private longer and going public at larger sizes. That means investors may keep seeing a large gap between when a company becomes enormous and when it appears in an index fund.
The practical takeaway is not to reshuffle a portfolio because of a headline. The better move is to understand what your funds actually own and why they own it. Investors should check whether their index exposure reflects their goals, either with an advisor or through careful research. The calm, fact-based review is more useful than reacting to news.
(00:00:00) - Intro
(00:00:57) - Do index funds automatically own the biggest companies?
(00:01:54) - Does SpaceX's absence actually matter for investors?
(00:03:14) - Where this shows up in real accounts
(00:04:43) - Active versus passive fund management explained
(00:06:15) - Is this a pattern we'll keep seeing?
(00:07:23) - What investors should actually do
(00:09:18) - Closing and contact info
ThimbleberryU 161 - What Do Giant IPOs Like SpaceX Mean For Your Portfolio?
[Music playing]
Jon Gay (00:07):
Welcome back to ThimbleberryU. I am Jon Jag Gay, I'm joined as always by Amy Walls from Thimbleberry Financial. Good morning, Amy.
Amy Walls (00:13):
Good morning, Jag.
Jon Gay (00:15):
Okay, so we're recording this on June 11th. And as we record this SpaceX is headed toward one of the largest IPOs in history. You've probably seen the headlines. And like most people, you probably have some of the same questions.
I know you're fielding some of these from your clients as well, Amy. How does this actually affect my portfolio, including the index funds in it? Am I missing out on something? Am I exposed to something I don't fully understand?
Today, we're going to answer that. And a quick note before we dig in. This is education, it's not a recommendation to buy or sell anything. Your own situation is its own conversation, as we've said many times (chuckles) in this podcast.
Amy, let's start with the assumption underneath all of the questions we just ran through. Most people figure an index fund just owns the biggest companies. Is that true?
Amy Walls (00:57):
Well, it is the most natural assumption, and it's not quite right. So, no, it's not true. An index fund by its nature follows rules.
So, what I mean by that is if you get into something like the S&P 500 index fund, a company has to meet profitability standards to have enough shares trading publicly and usually be public for a period of time first.
So, a company like SpaceX can be enormous. SpaceX could rank among the largest companies in existence, and still not show up in your index funds right away.
I think one of the things that happens here is not audibly, but mentally, index sounds to us like everything, and it isn't. It's whatever the rules allow at the time they allow it.
Jon Gay (01:54):
So, if my index fund might not even own it, does it actually matter for me or is this just “trivia?”
Amy Walls (02:03):
Well, don't take it to the neighborhood pub, although it's kind of what it is for a pub trivia night.
For most of our listeners, it matters far less than the worry suggests it does. One company being absent now or added later is a small slice of a diversified portfolio. So, it rarely changes whether you reach your goals.
The bigger risk usually isn't the index mechanics, it's what the fear of missing out tempts you to do about it (behavioral finance). Chasing a single hot stock to close a perceived gap (perceived being kind of our keyword there) is the move that actually changes your outcome and not usually in a good direction.
So, to answer your question more directly, "am I missing out," is: Not really in a way that should likely change your plans.
Jon Gay (03:02):
Yeah, we've talked about behavioral finance so many times in this podcast that catching a headline or getting emotional about it, you get away from that well-conceived, thought-out plan. That's where you get into trouble.
Amy Walls (03:13):
Absolutely.
Jon Gay (03:14):
Okay, so where does this actually show up in a real account somebody's looking at?
Amy Walls (03:21):
Well, anywhere you hold a broad index fund. That could be in a taxable brokerage account. There's some tax efficiency with index funds. Might be in your 401(k) because there aren't a lot of investment options. And so, you've got some index funds available there.
Maybe you're holding index funds in an IRA. The bottom line is if you're using index funds to capture broad market exposure, that's where this matters. I said it previously and it's worth saying again, that the inclusion rules on an index fund quietly shape what you actually own in all of those funds.
And so, this assumption that, “I'm in an index so I own everything,” really truly needs to be examined. You own whatever the fund's rules include at the time they include it. It's not a flaw.
It's just different than what many people kind of assume about the index funds. It's how the mechanics of an index fund work, good, bad or indifferent. But it is worth knowing for trivia night, but also because it changes how you read and interpret and make assumptions about your own holdings.
Jon Gay (04:43):
So, Amy, index funds that we're talking about here are passive. A lot of people hold passive funds, but I'm not sure everyone could define what that means, including me. What's the actual distinction?
Amy Walls (04:55):
The distinction is about how the fund is managed, not about whether decisions were made. So, an active fund has a manager making ongoing judgment calls, selecting individual securities, deciding when to buy and sell.
They're ultimately trying to outperform the market. A passive fund, like an index fund, tracks an index mechanically. And just that right there implies, well, if SpaceX is added into this index, it's going to be part of my index fund.
It doesn't have a manager exercising judgment on individual stocks. It's just following the rules of the index. And so, that's why if it's saying a fund has to be public for so long and fit these criteria for so long before it fits in, why something like SpaceX might be excluded for a period of time.
So, ultimately, Jag, passive means there's no active stock picking happening. But it doesn't mean that the index itself is neutral or arbitrary. Someone did design the rules that determined what gets in, what gets excluded, and when. And those rules were deliberate. And obviously, they shape what you own.
Jon Gay (06:15):
Okay, so, the genesis of today's conversation was SpaceX and this upcoming IPO. I have to ask, is this SpaceX situation a one-time thing, or could this be a pattern we're going to keep seeing, in your opinion?
Amy Walls (06:25):
It's a pattern. Large private companies have been staying private longer and going public later, and they're much larger. That means that the gap in time between, "This company is enormous," and "Oh, it's in my index fund," can be there for quite a long time.
And these same questions we're talking about, in the intro you were talking about, "They're going to surface every time one of these large companies lists." There is a lesson to carry forward though.
How your investments are built matters as much as which ones you own. So, whether you're choosing passive investments or active investments, how that portfolio is built and why it was built for your situation is really important.
And if you understand that once, you don't have to relearn this every time we have one of these companies list.
Jon Gay (07:23):
That is a really good point. So, to wrap up, Amy, for someone listening right now, what's the actual move?
Amy Walls (07:29):
I'm going back to let's reduce our cognitive load. The main move is what not to do. You don't reshuffle your plan because of the headline. What's worth doing is understanding what you actually do own, what your funds hold by design, and not by accident.
And if you do want to know whether your index exposure reflects what you intend, that's a good conversation to have with your advisor or if you're a do-it-yourselfer to do research on. But not to either assume it doesn't and go out and buy a lot of this, or assume it does when you really feel strongly you want to own some of it.
But what I'm really getting at here is a calm check based on facts. And instead of reacting to the news, which is usually the costly move, but it's the one that looks like something. And the other one looks like doing nothing.
As an investor, keeping an eye on how the market plumbing shifts is your advisor's job with you checking in to have information to understand it.
Jon Gay (08:47):
I've used this analogy before, but if you have a sore knee (like I do at the moment), you ask the knee specialist about it. You don't just try to fix it yourself or catch the latest headline of, "This is what to do from your newsfeed on social media if you have a sore knee."
You talk to the professional and know that you can't just react to these things. It is so critically important to just keep the plan, and if you have a question, talk to a trusted advisor.
Amy Walls (09:15):
Absolutely. We don't know what we don't know.
Jon Gay (09:18):
Yeah. Well, Amy, if somebody listening has questions about this topic or really anything related to personal finance and financial planning, what are the best ways to reach you at Thimbleberry?
Amy Walls (09:27):
Yeah, they can reach us online at thimbleberryfinancial.com, or by giving us a call at (503)-610-6510.
Jon Gay (09:36):
Great stuff. We'll talk again soon.
Amy Walls (09:38):
Sounds good, Jag. Look forward to it.
[Music playing]
Voiceover (09:40):
Securities offered through registered representatives of Cambridge Investment Research Inc., a broker-dealer, member of FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research Inc., a broker-dealer, member of FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.