What happens if a company outgrows S&P 600?

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Booogle
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What happens if a company outgrows S&P 600?

Post by Booogle »

What happens if a company outgrows S&P 600?
Soon2BXProgrammer
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Re: What happens if a company outgrows S&P 600?

Post by Soon2BXProgrammer »

Booogle wrote: Thu Oct 21, 2021 7:19 pm What happens if a company outgrows S&P 600?
If it no longer meets the definition of the index, it will get dropped from the index, and the funds will have to sell it.

(It might or might not get picked up by the midcap index)
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Re: What happens if a company outgrows S&P 600?

Post by TropikThunder »

Booogle wrote: Thu Oct 21, 2021 7:19 pm What happens if a company outgrows S&P 600?
S&P has inclusion criteria for their S&P 500, 400, and 600 indexes that go beyond just market cap (profitability, liquidity, free float, etc). But assuming a company satisfied those criteria for the Small Cap 600 (because you used the term "outgrow"), then it would still satisfy those criteria for the Midcap 400 as well (they have the same standards). The Small Cap 600 goes from ~$850M - $3.6B market cap, while the Mid Cap 400 goes from ~$3.6B - $13.1B so a company that crosses the $3.6B market cap level would likely move to the Mid Cap 400 at the next rebalancing unless S&P has other reasons not to move them.
000
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Re: What happens if a company outgrows S&P 600?

Post by 000 »

Dumped. Sell the winners to buy more losers.....
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Re: What happens if a company outgrows S&P 600?

Post by secondopinion »

000 wrote: Thu Oct 21, 2021 10:12 pm Dumped. Sell the winners to buy more losers.....
Or buy the next winner; we do not know which it will be.
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HomerJ
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Re: What happens if a company outgrows S&P 600?

Post by HomerJ »

Actually, this is an interesting point, tax-wise...

SP 500 is a pretty tax-efficient fund, because the only way to get dropped from the fund is because a stock is doing poorly (therefore no capital gains when the SP500 Index drops it).

But if a stock grows too big for a small-cap fund, and has to be sold because it is doing so well, that small-cap fund will incur a lot of capital gains, right?

Edit: I guess a stock in the SP500 could be taken private and all shares bought out... That would cause capital gains for a large-cap fund, too.
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Re: What happens if a company outgrows S&P 600?

Post by secondopinion »

HomerJ wrote: Sat Oct 23, 2021 11:45 am Actually, this is an interesting point, tax-wise...

SP 500 is a pretty tax-efficient fund, because the only way to get dropped from the fund is because a stock is doing poorly (therefore no capital gains when the SP500 Index drops it).

But if a stock grows too big for a small-cap fund, and has to be sold because it is doing so well, that small-cap fund will incur a lot of capital gains, right?

Edit: I guess a stock in the SP500 could be taken private and all shares bought out... That would cause capital gains for a large-cap fund, too.
S&P 600 pays less dividends than S&P 500. It balances out usually.
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Re: What happens if a company outgrows S&P 600?

Post by 000 »

HomerJ wrote: Sat Oct 23, 2021 11:45 am Actually, this is an interesting point, tax-wise...

SP 500 is a pretty tax-efficient fund, because the only way to get dropped from the fund is because a stock is doing poorly (therefore no capital gains when the SP500 Index drops it).

But if a stock grows too big for a small-cap fund, and has to be sold because it is doing so well, that small-cap fund will incur a lot of capital gains, right?

Edit: I guess a stock in the SP500 could be taken private and all shares bought out... That would cause capital gains for a large-cap fund, too.
Not generally a problem with ETFs but could be for traditional mutual funds.

I don't think many S&P 500 firms have been taken private.
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Re: What happens if a company outgrows S&P 600?

Post by secondopinion »

000 wrote: Sat Oct 23, 2021 3:52 pm
HomerJ wrote: Sat Oct 23, 2021 11:45 am Actually, this is an interesting point, tax-wise...

SP 500 is a pretty tax-efficient fund, because the only way to get dropped from the fund is because a stock is doing poorly (therefore no capital gains when the SP500 Index drops it).

But if a stock grows too big for a small-cap fund, and has to be sold because it is doing so well, that small-cap fund will incur a lot of capital gains, right?

Edit: I guess a stock in the SP500 could be taken private and all shares bought out... That would cause capital gains for a large-cap fund, too.
Not generally a problem with ETFs but could be for traditional mutual funds.

I don't think many S&P 500 firms have been taken private.
Stock buybacks are a step towards such an action.
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Re: What happens if a company outgrows S&P 600?

Post by 000 »

secondopinion wrote: Sat Oct 23, 2021 7:47 pm
000 wrote: Sat Oct 23, 2021 3:52 pm I don't think many S&P 500 firms have been taken private.
Stock buybacks are a step towards such an action.
What? :confused
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Re: What happens if a company outgrows S&P 600?

Post by drk »

HomerJ wrote: Sat Oct 23, 2021 11:45 am But if a stock grows too big for a small-cap fund, and has to be sold because it is doing so well, that small-cap fund will incur a lot of capital gains, right?
Not necessarily. ETFs are able to divest of these companies without selling anything. Vanguard and iShares are good about that, while State Street used to struggle with it.
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Re: What happens if a company outgrows S&P 600?

Post by secondopinion »

000 wrote: Sat Oct 23, 2021 7:49 pm
secondopinion wrote: Sat Oct 23, 2021 7:47 pm
000 wrote: Sat Oct 23, 2021 3:52 pm I don't think many S&P 500 firms have been taken private.
Stock buybacks are a step towards such an action.
What? :confused
The holders are increasing their ownership using the earnings. Those who do not sell will eventually own the company; it is going private in slow motion.

Why does this seem absurd?
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Re: What happens if a company outgrows S&P 600?

Post by 000 »

secondopinion wrote: Sat Oct 23, 2021 8:03 pm The holders are increasing their ownership using the earnings. Those who do not sell will eventually own the company; it is going private in slow motion.

Why does this seem absurd?
It is absurd because you have not shown that buybacks will reduce the ownership to the point where the company will be delisted.
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Re: What happens if a company outgrows S&P 600?

Post by drk »

000 wrote: Sat Oct 23, 2021 3:52 pm I don't think many S&P 500 firms have been taken private.
Not by percentage, but it happens pretty regularly: https://en.wikipedia.org/wiki/List_of_S ... components
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Re: What happens if a company outgrows S&P 600?

Post by secondopinion »

000 wrote: Sat Oct 23, 2021 8:08 pm
secondopinion wrote: Sat Oct 23, 2021 8:03 pm The holders are increasing their ownership using the earnings. Those who do not sell will eventually own the company; it is going private in slow motion.

Why does this seem absurd?
It is absurd because you have not shown that buybacks will reduce the ownership to the point where the company will be delisted.
It might not be anything meaningful, but it is closer than before. It is definitely not the opposite.
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Re: What happens if a company outgrows S&P 600?

Post by 000 »

drk wrote: Sat Oct 23, 2021 8:19 pm
000 wrote: Sat Oct 23, 2021 3:52 pm I don't think many S&P 500 firms have been taken private.
Not by percentage, but it happens pretty regularly: https://en.wikipedia.org/wiki/List_of_S ... components
Most of those events weren't due to being taken private.
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Re: What happens if a company outgrows S&P 600?

Post by 000 »

secondopinion wrote: Sat Oct 23, 2021 8:29 pm
000 wrote: Sat Oct 23, 2021 8:08 pm
secondopinion wrote: Sat Oct 23, 2021 8:03 pm The holders are increasing their ownership using the earnings. Those who do not sell will eventually own the company; it is going private in slow motion.

Why does this seem absurd?
It is absurd because you have not shown that buybacks will reduce the ownership to the point where the company will be delisted.
It might not be anything meaningful, but it is closer than before. It is definitely not the opposite.
I would be more concerned about the shrinking number of publicly listed firms (~5000 20 years ago to ~3500 today) primarily due to voluntary delisting because of regulatory burden placed on public firms.

Stock buybacks OTOH are really just a gimmick to avoid taxes and pad the value of executive stock options. I don't think one need be concerned enough to view them as a road to delisting.
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Re: What happens if a company outgrows S&P 600?

Post by drk »

000 wrote: Sat Oct 23, 2021 8:32 pm
drk wrote: Sat Oct 23, 2021 8:19 pm
000 wrote: Sat Oct 23, 2021 3:52 pm I don't think many S&P 500 firms have been taken private.
Not by percentage, but it happens pretty regularly: https://en.wikipedia.org/wiki/List_of_S ... components
Most of those events weren't due to being taken private.
Not sure why you chose to pick that nit, but OK.
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Re: What happens if a company outgrows S&P 600?

Post by 000 »

drk wrote: Sat Oct 23, 2021 9:02 pm
000 wrote: Sat Oct 23, 2021 8:32 pm
drk wrote: Sat Oct 23, 2021 8:19 pm
000 wrote: Sat Oct 23, 2021 3:52 pm I don't think many S&P 500 firms have been taken private.
Not by percentage, but it happens pretty regularly: https://en.wikipedia.org/wiki/List_of_S ... components
Most of those events weren't due to being taken private.
Not sure why you chose to pick that nit, but OK.
It's not a nitpick. You were trying to correct me, but my statement was in response to the previous poster who said: "Edit: I guess a stock in the SP500 could be taken private and all shares bought out".

You are correct that there is regular shakeup in the S&P 500. No disagreement.
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Re: What happens if a company outgrows S&P 600?

Post by drk »

000 wrote: Sat Oct 23, 2021 9:12 pm It's not a nitpick. You were trying to correct me, but my statement was in response to the previous poster who said: "Edit: I guess a stock in the SP500 could be taken private and all shares bought out".

You are correct that there is regular shakeup in the S&P 500. No disagreement.
I was adding color/context, not trying to correct your opinion. If you go look at the link, you'll see examples of companies being taken private (e.g., Staples) or being merged into foreign companies (e.g., LVMH buying Tiffany). Again, it's not many as a percentage of S&P 500 companies, but it does happen regularly (surprisingly so, IMO).
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Re: What happens if a company outgrows S&P 600?

Post by 000 »

drk wrote: Sat Oct 23, 2021 9:43 pm
000 wrote: Sat Oct 23, 2021 9:12 pm It's not a nitpick. You were trying to correct me, but my statement was in response to the previous poster who said: "Edit: I guess a stock in the SP500 could be taken private and all shares bought out".

You are correct that there is regular shakeup in the S&P 500. No disagreement.
I was adding color/context, not trying to correct your opinion. If you go look at the link, you'll see examples of companies being taken private (e.g., Staples) or being merged into foreign companies (e.g., LVMH buying Tiffany). Again, it's not many as a percentage of S&P 500 companies, but it does happen regularly (surprisingly so, IMO).
My apologies for any misunderstanding. I was not trying to nitpick you. The relevant difference from my view in the context of this thread was the differing tax situation from a private buyout versus acquisition by another public firm.

Related to your most recent comment I seem to recall at one point S&P 500 ETFs reporting some foreign holdings, I believe from a firm that had redomiciled in Ireland, but I no longer see it.
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Re: What happens if a company outgrows S&P 600?

Post by retire2022 »

Booogle wrote: Thu Oct 21, 2021 7:19 pm What happens if a company outgrows S&P 600?
If the company is no longer part of the index, and you desire to retain the security, best to invest in Total Stock Market index, ie VTSAX or VTI and it will capture all phases of growth from small to mid cap and large.

best
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Re: What happens if a company outgrows S&P 600?

Post by CRC_Volunteer »

drk wrote: Sat Oct 23, 2021 8:19 pm
000 wrote: Sat Oct 23, 2021 3:52 pm I don't think many S&P 500 firms have been taken private.
Not by percentage, but it happens pretty regularly: https://en.wikipedia.org/wiki/List_of_S ... components
How was Dell handled when they went private several years ago?
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Re: What happens if a company outgrows S&P 600?

Post by drk »

BMWrider1986 wrote: Sat Oct 23, 2021 9:57 pm How was Dell handled when they went private several years ago?
Not sure what you mean. The company was removed from the index, but each fund has some discretion in how to handle that. If you check out interviews with the fund managers for Vanguard 500 (e.g., Bogleheads on Investing), you'll hear a lot of interesting details about how they think about this kind of thing.
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Re: What happens if a company outgrows S&P 600?

Post by secondopinion »

000 wrote: Sat Oct 23, 2021 8:46 pm
secondopinion wrote: Sat Oct 23, 2021 8:29 pm
000 wrote: Sat Oct 23, 2021 8:08 pm
secondopinion wrote: Sat Oct 23, 2021 8:03 pm The holders are increasing their ownership using the earnings. Those who do not sell will eventually own the company; it is going private in slow motion.

Why does this seem absurd?
It is absurd because you have not shown that buybacks will reduce the ownership to the point where the company will be delisted.
It might not be anything meaningful, but it is closer than before. It is definitely not the opposite.
Stock buybacks OTOH are really just a gimmick to avoid taxes and pad the value of executive stock options. I don't think one need be concerned enough to view them as a road to delisting.
It does allow them to dilute the stocks later on. Like paying off a bond with earnings, it is a way to get back some ability to capital-raise in the future. Diluting stock is like the act of making it public; think of the actual rationale of making it public in the first place: to raise capital.

I know there are some tax tricks and other reasons, but it is marginally like going private to buy stocks back with earnings. The state of being public is binary, but a company with only 3% of share available is more or less privately owned in voting terms. Buybacks reduce the voter base; diluting it increases the voter base.
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