Everything You’ve Been Told About Index Funds Is No Longer True: Phil Bak
Original author: Quoth the Raven
Peggy
Let’s talk about what’s happening in the capital markets, especially with index funds. But first, we need to understand what a “fall from grace” actually looks like. To do that, we need to start with Pete Rose.
Pete Rose wasn't just a baseball star—he embodied what every baseball fan thought a baseball star should be: covered in dirt, playing with relentless effort, tough, and tenacious. Later, he became a player-manager, serving as the face of his team and a symbol of the sport itself.
But during this process, he made some mistakes—mistakes that turned out to be the most serious of his era: betting on the sport he played. Today, this seems ironic, as sports betting has become available on everyone’s phone and is constantly advertised across all sporting events. But back then, people still placed greater importance on older ideals, such as “integrity.” As a result, the league decided to make an example of Pete Rose.
Fifteen years later, broken Pete Rose had to borrow his last remaining fame to pay the bills, appearing at WrestleMania. Soon, he found himself standing in the ring facing a 400-pound Samoan wrestler, Rikishi.
I must warn you: proceed with caution. Rikishi has a signature move called the "stinkface"—as its name suggests, it’s truly unforgettable: Rikishi traps his opponent in the corner of the ring, turns around, backs up, and presses his massive buttocks directly into the opponent’s face, sending the crowd into a frenzy.
You can check for yourself. It’s as bad as it sounds.
When Rikishi rubs his massive buttocks against Pete Rose’s face, if you look closely, you’ll see something unusual: a certain look in Pete’s eyes—a mixture of sorrow and acceptance. It’s the expression of someone who has come to realize just how far they’ve fallen. His gaze no longer resists or rages against his current reality; instead, it grows distant, weary, and resigned to this new, heartbreaking truth.
John Bogle is no longer with us. I can only imagine the expression he would wear if he saw what is happening to index funds today. I can only imagine it would be the same sorrowful gaze—the same dazed, weary acceptance—that his great invention, once standing so high, is now sinking into the sewer of fraud.
If you’ve been reading my articles since early on—especially when I wrote more about stocks and ETFs—you can probably guess what I’m about to say. But if you’re a new reader, let me first bring you up to speed. Here’s how things actually unfolded:
Low-cost investing was once a powerful narrative that positioned ordinary investors against the greed of Wall Street;
This narrative drives capital inflows into passive index funds;
Capital inflows drove performance, causing the market-cap-weighted factor—essentially a combination of the reverse size factor and momentum factor—to outperform all other factors;
Outperforming performance attracts more capital inflow, thus closing the cycle;
Options trading volume has surpassed spot stock trading volume, and derivatives linked to the largest indices are now driving prices more deeply than the index funds themselves;
That's it—valuation no longer matters to the market.
All of this has brought us to today—and to this Rikishi moment we are now facing: the SpaceX IPO.
First, Nasdaq modified the Nasdaq-100 Index rules to make it easier and faster for newly listed mega-cap companies like SpaceX to enter the index. These rule changes appear to weaken traditional index standards around free-float shares, liquidity, investability, and replicability. Time will tell whether this is ultimately beneficial or detrimental to investors. But one thing is certain: it strongly favors Nasdaq in its efforts to secure SpaceX as its primary listing venue.
You can certainly say it’s insane to allocate stocks based on major exchanges. And you’d be absolutely right. I’ve attended those presentations—why a company chooses to list on the NYSE versus Nasdaq has nothing to do with the relative investment value of S&P or QQQ. We’re talking about two completely disconnected worlds.
For example, people think they’re buying tech stocks when they invest in the Nasdaq-100, but it includes Costco, Walmart, and a host of other non-tech companies. They might assume they’re getting Oracle or Uber too, but they aren’t—because those companies chose to list on the NYSE, a decision entirely unrelated to your investment goals. As a result, you miss out on them.
This is insane.
But it has always been this way—and now it’s worse. Because this time, it’s not just about where companies list. All index providers have altered their index methodologies solely to force companies like SpaceX, Anthropic, and OpenAI into their indexes. If valuation still matters, the price levels at which index fund investors will buy these companies will make you sick.
According to Hedgeye, the damage is as follows:
Rule changes surrounding the SpaceX IPO:
The index provider waived the profitability requirement and reduced the post-listing observation period from 90 days to 5 days.
This will force over $30 trillion in passive 401(k) and retirement funds to buy SpaceX at IPO valuation.
Bloomberg Intelligence estimates that S&P 500 funds must absorb 19% of SpaceX's outstanding shares within six months.
The Russell 1000 and Nasdaq-100 funds will account for 24%.
The rules originally designed to protect passive investors:
Since 2002, the S&P 500 has required companies to have a 12-month trading history and to have generated GAAP profits for four consecutive quarters. Both of these requirements are now waived.
Nasdaq has shortened its inclusion window from 90 trading days to 15 trading days.
FTSE Russell has shortened it to five trading days.
These three benchmark indices are now designed to purchase SpaceX at its IPO pricing level.
This is the moment. The "jumping the shark" moment for index funds. This is the moment when the great Pete Rose stared at Rikishi’s enormous backside with a look of despair.
Investors are no longer just outsourcing stock selection; they’ve also outsourced asset allocation, IPO discipline, liquidity judgment, valuation discipline, listing location decisions, and prudence. They’ve handed over all active control in their trading to index committees—committees that sway with the wind.
Indices are no longer neutral. They are making active bets—specifically on the most overvalued companies, at the peak of their valuations.
Active management has never had a better entry point. Passive indexing has never been more important. A major shift is finally on the horizon.
Everything you've heard in the past about "smart but boring" index funds no longer holds true.
While you still can, leave now. Choose your own methodology, select your own factors, pick your own stocks, and reclaim control over your portfolio.