Everything You've Been Told About Index Funds Is No Longer True: Phil Bak
Quoth the Raven
· QTR’s Fringe Finance
· June 02, 2026 at 11:23
· ⏱ 9 min read
| Read on Substack ↗
Summary
The article argues that index fund providers have corrupted their own methodologies by waiving profitability and liquidity rules to force passive investors into buying frothy private company IPOs like SpaceX at peak valuations, marking a 'Rikishi moment' where the original promise of low-cost, passive investing is shattered. This implies a structural shift favoring active management and direct indexing as investors lose faith in benchmark neutrality.
•Index providers (S&P, Nasdaq, FTSE Russell) waived profitability requirements and shortened seasoning windows for the SpaceX IPO, with the S&P 500 dropping its 12-month trading and 4-quarter GAAP profitability rule that had been in place since 2002.
•Bloomberg Intelligence estimates S&P 500 funds must absorb 19% of SpaceX's float within 6 months, while Russell 1000 and Nasdaq-100 funds will absorb 24%, forcing over $30 trillion in passive retirement money to buy at IPO pricing.
•The article describes a circular loop where passive flows drove outperformance of market-cap-weighted indexes, which attracted more flows, but now valuations no longer matter and the system is broken.
•Nasdaq changed its Nasdaq-100 index rules to make it easier for newly public mega-caps like SpaceX to enter, weakening traditional standards around free float, liquidity, investability, and replicability.
•The author compares the current state of index funds to Pete Rose's humiliation by wrestler Rikishi, arguing investors have outsourced all agency—security selection, asset allocation, IPO discipline, liquidity judgment, valuation discipline, venue selection, and prudence—to index committees making active bets on frothy companies.