This is wrong in multiple ways.

First: 5x5 is 25, not 20. So it's 25% rather than 20%

Second: they only have to buy the 25% of the listed shares.

To take your 1 Trillion example: if SpaceX has a total market cap of 1T, but only 500b get listed on NASDAQ, and the free float is 5%, the index will weigh SpaceX at 25% of the listed shares, which means it will be weighted at 500 * 0.25 = 125b.

And also note that index ETFs have tracking errors all the time (that's why arbitrage traders still have business!), and the ETFs themselves could also track the performance of SpaceX via derivatives instead of buying the stock. And I think, there are many investors of SpaceX who would like to sell some shares. Fund managers won't have an issue finding their phone numbers.

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rokobobo 3 hours ago | parent [-]

I don’t think Nasdaq is free float based.

Also, I would be a lot more pessimistic of the index tracking fund managers’ ability or willingness to find extra shares: their goal is to match the index, not beat it. If the index includes the new firm at a blown-up price because everyone sent their buy orders at the same closing auction, then all the index-tracking funds still track their underlying index. They do not care that after that closing auction, the price of the new firm—and likely the index itself—is going to drop.

	▲	super256 2 hours ago \| parent [-]
		>I don’t think Nasdaq is free float based. I recommend the NDX proposal from February which the whole discussion is based upon: "To balance index integrity and investability, Nasdaq proposes a new approach for including and weighting low-float securities (those below 20% free float). Each low-float security’s weight will be adjusted to five times its free float percentage, capped at 100%. Securities with more than 20% free float will continue to be weighted at full, eligible listed market capitalization, while those below 20% free float will be weighted proportionally to preserve investability." The document includes a scenario with the rules applied to SpaceX. "Company C" in the table is SpaceX (with some estimated numbers). https://indexes.nasdaqomx.com/docs/NDX_Consultation-February...