A Courageous Independent Decision

In its June 4th announcement of the results of a recent public consultation on “Treatment of MegaCap Companies”, S&P Dow Jones Indices stated there would be no change to the index methodology governing the S&P 500®. General eligibility requirements, which apply to all candidates for new selection into any of the components of the S&P Composite 1500 (including the 500), include a 12-month IPO seasoning period, a minimum percentage of free float shares (10%), and “financial viability” which is measured as a positive sum of GAAP earnings over the last 4 quarters AND a positive value in the most recent quarter. In its consultation, S&P DJI contemplated relaxing or eliminating these rules for mega-cap names, presumably in order to fast-track the addition of SpaceX and others.

While it may grow significantly down the road, the initial impact of this decision in terms of performance relative to total market indexes will be quite modest. However, the deeper impact, in terms of significance for index investing overall, looms large. If ever there were relevant examples of why index methodologies matter, this is the poster child. As John Auther’s Points of Return column stated on June 8th, “…. ‘passive’ managers are giving their clients an active choice: the Nasdaq 100 or a total-market index if you want to dive straight in to this year’s IPOs, and the S&P 500 if you’d rather wait until they’re established as public companies”. 

Let’s start with performance impacts. Despite its huge valuation, the weighting of SpaceX in total market indexes will be small because the float is small and the indexes are float-adjusted. However, its index weight may grow as share lockups expire and free-float adjustments are accordingly made at index providers. This pattern may be repeated with additional mega-cap IPOs like OpenAI and Anthropic. Over time, the performance contribution of these names to total market benchmarks therefore may well increase, particularly if the stocks appreciate markedly.

As a consequence, there is now a potential for wider performance dispersion among large-cap benchmarks than most investors are accustomed to. We certainly already see significant dispersion in certain periods among popular small-cap benchmarks and within other categories such as emerging markets. But most investors are used to seeing annual performance between major large-cap US benchmarks that is fairly close. That may change in the years to come.

Of course, if it eventually meets eligibility requirements, SpaceX and others may be considered for entry into the 500. If they get in, the period of large-cap benchmark performance dispersion may then subside until the next mega-cap IPO. If such a situation occurs, it may be remind many of the period before Tesla’s entry into the 500. TSLA was included in total market benchmarks for years and became quite a large company by the time it reported positive earnings. Shortly afterward, it was admitted to the S&P 500®, but S&P DJI was criticized for its index methodology because S&P 500® index trackers missed earlier TSLA returns and possibly paid a premium for the shares because the price may have run up in anticipation of its addition to the index.

In this case, I suspect that if SpaceX and/or other pending mega-cap IPOs flop you will predominantly hear praise for S&P DJI and if they do well you will mostly hear bitter criticism again about its flawed approach to indexing. Such is the nature of Monday morning quarterbacks.

The only thing that would have been worthy of criticism in this instance is if S&P DJI had compromised its governance process or independence. You can argue about whether the 500 is a good benchmark. As a fixed count index, it was unnatural from the start. It has always been selective; a club, if you will. But entry to that club is governed by a committee that takes its task to heart, which is to execute the index methodology with dispassionate and forthright debate and analysis after gathering feedback from market participants.

One of the results of that faithful execution is that index investors now have a more meaningful choice about which core US equity benchmark they put dollars behind. The stock market is changing, and we don’t know how this story will unfold. But S&P DJI put its money where its mouth is when the US Index Committee made a courageous independent decision. This may be a moment eventually looked back upon as one when its reputation was burnished, or one when it was tarnished. We simply do not know how that will unfold.

As to whether the 500 is a good benchmark, it is flawless at representing its own methodology. The real question is whether you think its methodology is good. And what its methodology dictates, and its governing committee carries out, is a relatively broad index of generally large-cap profitable companies. That is not the total stock market, but it is a meaningful segment that many investors would do well to have exposure to. As S&P DJI stated in its announcement, “Although there may be trade-offs between strict adherence to these eligibility requirements and broad representativeness, the current methodology provides substantial market coverage and sector balance”.

Can the profit measure it references be gamed? Of course, but by using GAAP earnings the index rests on credible accounting standards. Are there already exceptions to the financial viability rule. Yes, but they are in the methodology and cover unique circumstances such as when a member of the index spins off a new company or when a member of the 500, 400, or 600 moves to another within the family (recall this rule is assessed at entry to the 1500 as a whole).

If and when you hear that the S&P Index Committee is the world’s largest active manager, I hope you now understand that is complete nonsense. The issue under consideration in the recent consultation was about index eligibility rules. This is generally not an area where the committee applies discretion. Where it does apply a degree of subjectivity is when more stocks are eligible than there are slots in the index to fill. This is chiefly a result of its fixed count. But committee members do not attempt to outperform the total market or any other benchmark when they select new index additions; they try to balance the often competing principles of indexing – market representation, investability, transparency, and, importantly at S&P DJI – independence. We don’t know whether investors will do better tracking the total market or the 500, but we do know they now have a meaningful choice.

© 2026 Philip Murphy. All rights reserved. The information presented is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services are only offered through IndiePlan™ LLC, an investment adviser registered with the state of New York.