Equity Ascent Indexᴵᴾ: A New Era in Equity Investing
Traditional broad market indexes were designed for a world that no longer exists. High growth companies now scale with private capital, often entering the public markets as mid or large cap companies. Public markets no longer capture these returns, and many indexes continue to exclude growing companies for years after they finally go public.
This change in where and how companies grow has fundamentally altered the risk and return profile of each market tier. Small caps tend to benefit from a quality bias, the momentum theme dominates mid caps, and the large cap space benefits from outsized scale + growth.
We created the Equity Ascent Indexᴵᴾ because growth has changed. Your index should too.
The Problem: Growth Has Fundamentally Changed
The way companies mature in public markets has undergone three profound structural shifts over the past two decades. These changes have rendered legacy index methodologies ineffective, creating systematic blind spots that cost investors billions in missed opportunities while exposing them to hidden concentrations of speculative risk.
Small Cap Quality Collapse
42% of Russell 2000 companies are now unprofitable, compared to just 15% in 1994—a fundamental deterioration in small-cap quality
Mega-IPO Phenomenon
Companies now debut at $10B+ valuations, bypassing traditional mid-cap indexes entirely and creating massive coverage gaps
Factor Strategy Failure
One-size-fits-all factor approaches miss that quality matters in small caps while momentum drives mid-cap alpha
Shift #1: The Small-Cap Quality Crisis
The small-cap universe has experienced a profound quality decline that represents a structural, not cyclical, shift. Higher-quality companies now stay private longer, avoiding the costs and scrutiny of public markets. Meanwhile, the companies that do go public as small caps increasingly represent speculative ventures, fallen angels, and businesses that couldn't attract private capital.
For investors tracking broad small-cap indexes, this means nearly half their small-cap allocation may be in unprofitable, speculative companies—often without realizing it. This isn't a temporary phenomenon but a permanent change in market structure that demands a new approach.
The percentage of profitable companies in the Russell 2000 has declined from 85% to just 58% over three decades.
Shift #2: The "IPO at Scale" Era
Twenty years ago, the median IPO market capitalization was under $500 million. Today, unicorns routinely debut at $10 billion, $50 billion, or even $100+ billion valuations. Companies like Snowflake, Rivian, and Coinbase went public at valuations that placed them immediately in large-cap territory, fundamentally changing the game for index investors.
Traditional indexes impose "seasoning" requirements that delay IPO inclusion for 12 months or more. By the time these companies enter broad indexes, the highest-alpha window—when analyst coverage is thin, institutional ownership is ramping, and price discovery is incomplete—has already passed. Even more problematic: S&P indexes require profitability for inclusion, excluding transformational companies like Snowflake, Palantir, and CrowdStrike during their highest-growth phases.
The Quality Scaling & Momentum Coverage Gap
When you combine the S&P MidCap 400 (ceiling ~$18B) with the S&P 500 (floor ~$14B), reasonable coverage exists - for profitable companies. But the S&P's profitability requirement creates a massive "dead zone" for unprofitable, but quickly scaling, mega-cap IPOs.
A company like Snowflake at its $70B IPO found itself in no-man's-land: too large for S&P MidCap 400, yet failing the S&P 500 profitability requirement. It was excluded from both indexes until achieving profitability—missing the entire high-alpha phase when institutional ownership was being established.
The Russell indexes don't have this profitability requirement, which is why they capture these companies. However, Russell doesn't apply quality screens to filter out potentially problematic companies, such as the 42% of small-cap companies that are unprofitable.
Shift #3: One-Size-Fits-All Factor Failure
Factor investing has gained enormous popularity, with hundreds of billions flowing into quality, momentum, value, and other factor-based strategies. But these strategies typically apply the same factor screen across the entire market cap spectrum—an approach that's fundamentally flawed.
Small Cap Reality
Quality screens make perfect sense here, where 42% of companies are unprofitable. Filtering out junk is essential for generating excess returns.
Mid Cap Dynamics
Momentum captures companies in their acceleration phase. This is where disruptors scale from niche to mainstream, creating alpha opportunities.
Large Cap Paradox
Applying quality screens would exclude transformational companies like Amazon, which was unprofitable for years while building market dominance.
The market needs an index that applies the right factor at the right stage of the corporate lifecycle—not a one-size-fits-all approach that misses opportunities and creates unintended risks.
Introducing the Equity Ascent Indexᴵᴾ
The Equity Ascent Indexᴵᴾ solves these structural problems through lifecycle-aware factor investing—applying different investment strategies to different stages of the corporate lifecycle. Rather than forcing one factor approach across all market caps, we align factor selection with where companies are in their growth journey.
Small Cap Quality (10%)
100 holdings selected via quality composite, systematically removing unprofitable junk while capturing legitimate small-cap opportunities
Mid Cap Momentum (20%)
80 holdings selected via risk-adjusted momentum with Rule of 40 bypass, capturing high-growth disruptors before profitability
Large Cap Scale (70%)
~200 holdings weighted by float-adjusted market cap, with IPO gateway for mega-debuts, with adaptive filters for quality momentum
The Rule of 40 Innovation
What Is Rule of 40?
The "Rule of 40" is a SaaS industry benchmark stating that Revenue Growth % plus Free Cash Flow Margin % should equal or exceed 40%. Companies meeting this threshold demonstrate they're either growing fast enough to justify losses or profitable enough to justify slower growth.
By incorporating Rule of 40 into our Quality Gate for Technology, Healthcare, and Communications sectors, we include high-growth software and platform businesses before GAAP profitability—but only if they demonstrate legitimate software economics with 50%+ gross margins and accelerating revenue.
Path A: GAAP Profitable
Trailing four-quarter net income greater than zero—the traditional profitability test
Path B: Rule of 40
Revenue Growth % + FCF Margin % ≥ 40%, plus 50%+ gross margins for tech, healthcare, and communications only
This is NOT a blanket exception for unprofitable companies. Hardware companies, retailers, and industrials must demonstrate GAAP profitability.
Case Study: CrowdStrike—Captured Early
The Company
CrowdStrike pioneered cloud-native endpoint protection and went public in June 2019, remaining GAAP unprofitable until 2023.
Traditional Index Response
- S&P MidCap 400: EXCLUDED (profitability requirement)
- Russell MidCap: INCLUDED but no factor tilt
- Momentum ETFs: EXCLUDED (sourced from S&P)
Equity Ascent Approach
CrowdStrike would qualify for the Mid Cap Momentum sleeve via Rule of 40 bypass:
- Revenue Growth: 80%+ annually (2019-2021)
- Gross Margin: 75%+ (software economics)
- Rule of 40: Well over 100%
- Sector: Information Technology (eligible)
The Alpha Opportunity
IPO price: $34 (June 2019). Price when S&P-eligible: ~$140 (2023). Investors in S&P-based momentum strategies missed 4x returns waiting for profitability.
"The S&P profitability requirement, designed to ensure quality, actually excluded one of the highest-quality cybersecurity companies of the decade."
Case Study: Rivian—Successfully Avoided
Rivian is an electric vehicle manufacturer that went public in November 2021 at a $100+ billion valuation—briefly making it more valuable than Ford and GM combined. It has never been profitable and burns billions in cash annually.
Traditional indexes: Russell 1000 included it at June 2022 reconstitution (no profitability requirement). S&P 500 excluded it (profitability requirement).
Equity Ascent response: Rivian would be EXCLUDED from the Large Cap IPO Gateway. While GAAP unprofitable, it's also not eligible for the Rule of 40 bypass because it's a Consumer Discretionary company (not tech/healthcare/comms), and even if sector-eligible, it has only 10-15% gross margins—hardware economics, not software.
$78
IPO Price
November 2021
$28
Russell Entry
June 2022
$14
Current Price
65%+ loss from IPO
Not all unprofitable companies are equal. The Rule of 40 bypass and sector restriction ensure we capture software disruptors while avoiding hardware moonshots that burn cash without software economics.
Case Study: Snowflake—Captured at IPO
The Company:
Snowflake revolutionized cloud data warehousing and went public in September 2020 at a $33 billion valuation—the largest software IPO ever at the time. Despite being unprofitable, the company demonstrated exceptional growth and unit economics.
Traditional Index Treatment:
- Too large for Russell 2000 (debuted at $70B market cap on day one)
- Excluded from S&P MidCap 400 due to lack of profitability
- Missed by most quality-focused indexes due to negative earnings
- Not added to S&P 500 until 2024, missing years of growth
Equity Ascent Approach:
- ✓ Included immediately at IPO despite unprofitability
- ✓ Rule of 40 score exceeded 60% (100%+ revenue growth, strong FCF trajectory)
- ✓ Captured in Large-Cap Growth segment with momentum overlay
- ✓ Held through 400%+ appreciation in first 15 months
Performance Impact:
From IPO (Sept 2020) through peak (Nov 2021): +463%
Equity Ascent captured this transformational growth phase that traditional indexes completely missed due to outdated profitability requirements.
Case Study: WeWork—Successfully Avoided
The Company:
WeWork attempted to go public in 2019 at a $47 billion valuation but collapsed spectacularly. It eventually went public via SPAC in 2021 at a reduced valuation, then filed for bankruptcy in 2023.
Traditional Index Treatment:
- Would have been included in mid-cap indexes based purely on market cap
- Size-based methodologies provided no protection against fundamental deterioration
- Many passive funds were forced to hold through the SPAC merger
- Quality screens that relied only on historical metrics missed the warning signs
Equity Ascent Approach:
- ✗ Excluded at SPAC merger despite $9B market cap
- ✗ Failed Rule of 40: negative revenue growth acceleration + deeply negative FCF margin
- ✗ Quality screens flagged deteriorating unit economics and governance concerns
- ✗ Lifecycle analysis showed company regressing rather than progressing through maturity stages
Protection Provided:
WeWork declined 95%+ from SPAC merger to bankruptcy filing. The Equity Ascent Indexᴵᴾ's multi-factor quality framework and Rule of 40 discipline protected investors from this value destruction that size-only indexes could not avoid.
Key Index Specifications and Advantages
Total Holdings: ~380
Diversified across three lifecycle-aligned sleeves with quarterly rebalancing and annual June reconstitution aligned with Russell
IPO Fast Entry
Quarterly IPO review evaluates new public companies past lock-up expiration, capturing high-alpha windows traditional indexes miss
RIC Compliant
Full compliance with 25/50 rule for regulated investment company eligibility, ensuring fund compatibility
vs. S&P Composite
Captures unprofitable giants via Rule of 40 that S&P excludes during highest-growth phases
vs. Russell 3000
Quality-screens small caps, systematically removing the 42% unprofitable junk Russell includes
vs. Factor ETFs
Lifecycle-aware factors matched to corporate stage, not one-size-fits-all approaches
vs. IPO ETFs
Integrated exposure within diversified Equity Ascent Indexᴵᴾ, not standalone speculation on recent debuts
A New Framework for Equity Market Exposure
Growth has fundamentally changed. Companies stay private longer, debut at massive scale, and disrupt faster than ever before. An index designed for today's markets needs to recognize these structural shifts and adapt accordingly—not cling to methodologies designed for a world that no longer exists.
The Equity Ascent Indexᴵᴾ applies Quality defense where it's needed most (small caps), Momentum alpha where it's most effective (mid caps), and Scale beta with IPO capture where transformational companies emerge (large caps). It's a comprehensive solution for investors seeking broad US equity exposure without the systematic blind spots that plague legacy index approaches.
42%
Russell 2000 unprofitable companies systematically removed
10x
Median IPO size increase over two decades
380
Total holdings across three lifecycle sleeves
It's not just a new index. It's a new framework for thinking about equity market exposure in an era where the traditional pathways from small-cap to mid-cap to large-cap no longer apply.