I observed Monday to EDGE Daily Market Desk readers that stocks like CSGP would not be in the S&P 500 basket.
And now it’s been booted from the Nasdaq 100.
The point for investors is that creators of ETF baskets – statistical samples – for tracking benchmarks will skew selection toward winners. They’re not bound to buy the whole index. That practice distorts index performance and obscures risk.
CSGP is in the S&P 500. SNDK, WDC, INTC, MU, are all in the S&P 500. They’re also in the Nasdaq 100. Costar’s sin is being in real estate data. Not AI.
Costar has been replaced in the Nasdaq 100 by Lumentum (LITE), which makes high-performance components for AI infrastructure. LITE is up over 1,600% since May 1, 2025. CSGP is down 57%.
Passives pick winners and losers.
You can’t blame the Nasdaq. It licenses data to firms like Invesco, whose QQQ ETF with nearly $500 billion of assets is an AI hit. The Nasdaq had over $220 million of quarterly revenue from index products.
Indexes want the best (because you can’t gather assets with losing indexes). So the big get bigger. As catalyst stocks rise, they gain ground with ETFs, where 90% of assets are in large caps.
The S&P 500 is really the S&P Micron, the S&P Sandisk. The S&P Intel. As these get bigger they tilt index performance. (The average S&P 500 stock is not at a record high, fyi.)
The National Securities Clearing Corp, a unit of the DTCC, handles the processing, calculation, and distribution of ETF creation and redemption basket data. And the basket will have what Blackrock et al want.
That’s why, public companies, you want to LOOK LIKE what might be in the basket.
The two most powerful words in the Passive lexicon are “substantially similar.” You’ll find them scattered throughout prospectuses. Index and exchange traded funds track things. Could be a basket of stocks that the ETF sponsor creates. Or it might be licensed intellectual property from folks like MSCI, S&P, the Nasdaq.
If it’s the QQQ, the stocks they buy must be in the Nasdaq 100 – or substantially similar to those stocks.
Because there aren’t limitless supplies of QQQ stocks.
I’m theorizing here for example’s sake: Say Invesco publishes to the NSCC that it wants a set of stocks from the Nasdaq 100 reflecting tax-planning, volatility, liquidity or other characteristics that the firm needs.
Maybe Jane Street is the Authorized Participant getting that basket together for Invesco in trade for QQQ shares to sell for fractions of pennies higher each to the public.
And Jane Street doesn’t have any SNDK. But they’ve got IBM, ARM, KLAC. Heck, they’ve got RTX, which is substantially similar to SNDK – but way less volatile.
Look, I’m not saying this event has happened. My conversations with the folks in the industry suggest that it could.
If the basket is continually changing as stocks are “redeemed” – traded for ETF shares to, say, wash out capital gains – and ETF are created (a trillion dollars per month), what difference does it make if it’s RTX or SNDK?
As an ETF executive told me one time, “We take good collateral.”
So public companies, you want to look like the basket. And it’s why you can be in the S&P 500 like Costar yet not trade like it. If you’re not in “the basket,” you won’t benefit from inclusion.
But Tim. Don’t index funds have to own the index?
Yes. But they don’t have to buy and sell it. The statistical sample picked by ETFs will skew toward the best performers – and so the benchmark veers from reality.
We cherry-pick too at EDGE with our model portfolio (data, not advice) that’s up over 40% year-to-date. We create a quantitative basket. It continuously changes. We want liquid stocks with diverging Demand and Supply where Passives are the key behavior.
And there’s a clue here to when this prince of a 1999 market party may end. Back then, there were few ETFs. Now it’s the dominant investment vehicle of our day. And all the ETFs own the same stuff.
SNDK is up 123% just this month. Blackrock et al will need to wash out capital gains. How do they do that? They trade SNDK for ETF shares where the basket is substantially similar to SNDK.
What if everybody does it? A sudden oversupply of ETF shares tanks the market.
I’m (finally) reading Sebastian Malaby’s “More Money Than God” (which means something other than what people conclude). Did you know that the father of “hedged funds,” Alfred Winslow Jones, calculated volatility – he called it velocity – for stocks by hand in the 1950s? He understood its importance. And then everyone forgot.
You can’t understand risk if you don’t measure volatility. You get volatility when ETFs start washing gains from large caps like semiconductors. Big runs in stocks come and go violently in markets dependent on a handful for returns. There will likely be little warning when this one ends.
Meanwhile, public companies, do your best to be substantially similar (not different!) to what the money is buying. Investors, follow that money.
