5. ARM Holdings: wen index?
Super quick note/blurb. Two companies that I have been very loosely following are mooning and despite being bona-fide largecaps are not yet in any important tech indices/ETFs - ARM & SMCI. Let’s do ARM first.
ARM Holdings (ticker ARM US) has a market cap (as of this writing) of $146 bil but a free float of only $13 bil. ARM went public less than half a year ago. Despite being such a centrally-important company to the global semi / electronics ecosystem (especially the handset part of it), ARM is not in any major indices or ETFs.
S&P500. ARM isn’t in the S&P500 (and thus it isn’t in the XLK). ARM’s $146 bil mcap would make it 59th of the 500 constituents by market-cap, but this index is free-float weighted. Here, ARM’s $13 bil free-float alone is bigger than the total market cap of the bottom 70 of the constituents. The hold-up for the S&P500 is the requirement that the majority of the sharecount has to be in public hands. ARM only listed 9.3% of its shares. Unless I am colossally wrong, ARM needs a lot more secondaries until we can start talking about S&P500 inclusion, so let’s park that discussion to one side for now.
Nasdaq-100. ARM is listed on the Nasdaq Global Select portion of the exchange and comfortably meets all of the Nasdaq-100 index criteria (which are quite lax, e.g. no free-float requirement). Being added to the Nasdaq-100 will add ARM to the QQQ, a very important ETF. Nasdaq-100 reconstitutes each December, and I expect ARM will comfortably join it (and at a greater weight than, say, Globalfoundries/GFS). If ARM’s QQQ weight turns out to be 1.1% i.e. same as TXN’s (which is fair given almost identical market caps), unless my maths is very off, this would mean $3 bil of net-QQQ buying demand for ARM. Sizeable in the context of the current $13 bil ARM floated market cap value. Booyakasha.
MSCI World. Globally-oriented semis/tech investors will frequently consult the MSCI World tech & semis subgroup indices. ARM isn’t in the MSCI benchmarks so for now, even a company of ARM’s large stature is completely off-benchmark for such investors. MSCI updates constituents biannually, with the next update coming in May 2024 (and effective a short while later). ARM meets the MSCI’s key criteria of market-cap and free-float $ value, and will likely meet the traded liquidity criteria by the time of the MSCI index review. So I think ARM will join the MSCI indices in May.
MVIS US Listed Semiconductor 25 Index. This is an index of the 25 largest listed US semi companies, and is refreshed quarterly “on the second Friday of the quarter-end month” i.e. the next review is on March 8th 2024. This index is important because it dictates the biggest semi ETF out there - the SMH (VanEck Semiconductor ETF, market cap of c.$15 bil). ARM meets the market cap and free-float $ criteria as it is already comfortably larger than at least 2 of the 25 companies in this index (OLED or QRVO). If and when ARM joins, it’ll be a smaller weight in this index due to the free-float $ value weighting. However, ARM just misses out on joining the index at the March 8th review because its 9.3% free-float is just shy of MVIS’s minimum 10% requirement for new index joiners. Note that ARM’s IPO lockup expires March 12th. So perhaps, with a few more secondaries, ARM can be in the SMH later on in the year (summer). Reasonably safe bet, IMO.
Philadelphia Semiconductor Index (SOX). This index is important because it dictates the SOXX ETF (second largest ETF after SMH, with about $13 bil mcap). Members are added/kicked out annually in September. This is a simple index with very few criteria (notably, no free-float requirements) and is just a list of 30 largest-capitalization stocks listed in US. I’m fairly comfortable predicting that ARM will join the SOX(X) in September 2024. All else equal, it will be one of the biggest (top 5-10) weights in the 30.
TLDR: ARM will join a bunch of important semi indices later this year, but not the S&P500 (which it won’t join anytime on the horizon - unless Softbank is in a huge hurry to crystallize the gains post lock-up expiry and the market can absorb the supply). As these additions gradually unlock a wider investor base, perhaps ARM’s price action will be progressively more driven by ‘flows’. Currently ARM has 9 million short interest (c. 10% of free-float) but today already ARM traded a volume of almost 80 million shares. Price action in ARM lately is quite peculiar to me. E.g. after last week’s squeeze, I would have thought the “it’s the pods” explanation could no longer be trotted out again, but who knows. Regarding fundamentals / valuation, I have some (hazy) thoughts but nothing I wish to share at this particular stage. Also, if tomorrow ARM drops 70% and no longer meets the threshold criteria for the indices, then my predictions would have been wrong.
No position / no recommendation / DYOW.