Made In America

What does it really mean when a company is “Made in America”? In this episode of the IBKR Podcast, our guests from Nasdaq break down how global companies are classified for index inclusion—and why it’s more complicated than just where they’re headquartered.

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Summary – IBKR Podcasts Ep. 248

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman 

Hi everyone. My name’s Jeff Praissman with Interactive Brokers Podcast. It’s my pleasure to welcome Rob Jankiewicz, Director of Index Product Development at Nasdaq, and Nicole Torskiy, Lead Economic Research at Nasdaq. Hi guys, how are you? 

Nicole Torskiy 

We are doing well. Thank you for having us. How about you? 

Jeff Praissman 

I am doing great, and it’s my pleasure to have you guys in for our monthly podcast with Nasdaq. We have a really interesting subject — we’re gonna talk about global companies and how you classify where they’re domiciled. 

So for Nicole and Rob — we live in a global economy where certainly almost every large, probably many medium, and even small companies do business in several countries and continents. Many have head executive regions as well. Classify tough. Start at a basic level — what makes a stock American? 

Rob Jankiewicz 

Yeah, that’s a great question. And you’re right — classifying a company’s home country can certainly be difficult at times. If we start at a basic level, we may generally think of a company’s location based on where the company is headquartered or where a company’s primary equity security trades. 

So for example, let’s say there’s a company with headquarters in the US, and the company’s stock trades in the US as well. Then at a very basic level, we might consider this to be a US company. But, as I think we’ll talk about a little later on, there are typically other determinants of a company’s home country that are especially important for index construction. 

Jeff Praissman 

What are some of the other factors then that can determine if a company’s American? 

Rob Jankiewicz 

Right, so in reality, it’s not always as simple as headquarter location or listing exchange. It tends to be far more nuanced than that. So there are a few other factors that can help determine a company’s home. Most often, the company’s country of incorporation and the source of the company’s assets and revenues are also taken into consideration. 

For example, although a company may be based outside of the US, if its stock trades in the US and the majority of assets and revenues are also in the US, the company may very well be considered a US company. 

Jeff Praissman 

And a country’s location can affect so many items — obviously taxes, in this environment; tariffs, of course, it’s the hot list. But one of them that maybe some people don’t really necessarily think about is the eligibility to be included in certain indices. Do S&P, Russell, and Nasdaq all use the same rules to determine if a company’s eligible for indices? 

Rob Jankiewicz 

Yeah, that’s a great point. And the index rules do differ. So speaking in terms of the Nasdaq indexes, it really depends on that index in question. Although many people, I think, are familiar with the Nasdaq-100®, there’s a plethora of other indexes that Nasdaq operates, each with its own specific set of rules. 

So in terms of the Nasdaq-100 and Nasdaq Next Generation indexes — or you could really think of these as the… this is the index of the next 100 largest non-financial companies listed on Nasdaq outside of the parent Nasdaq-100 — a company’s incorporation and headquarter location doesn’t really matter. 

In fact, the indexes are unique in that they allow foreign company ADRs — or American Depository Receipts — to be eligible, while other major index providers don’t. With that said, there are other country indexes that Nasdaq does operate that do use country of incorporation, domicile, or primary listing exchange for eligibility. 

But in terms of the other index providers or other major benchmarks, I think it is a little different. Isn’t that right, Nicole? 

Nicole Torskiy 

Rob, thanks. So as for the other two, both the Russell and the S&P start with where a company’s incorporated, listed, and headquartered. But then each index applies rules on these locations a little differently. 

So the S&P looks at headquarters, incorporation, listing location, and where the plurality of assets and revenues are. If all the countries match, a company is assigned to that country. 

The Russell also starts with the same three factors of headquarters, incorporation, and listing location, but only checks assets and revenues if one of the three factors doesn’t match a single country. Then, S&P US indices also require a company to file 10-Ks or domestic issuer SEC filings to be eligible, while the Russell index allows foreign private issuer filers. 

And finally, how each index decides if a company not headquartered or incorporated in the USA is American is also a little different. 

Jeff Praissman 

So Nicole, are there other items index providers will use that can help categorize a company’s domicile if all these criteria aren’t met? 

Nicole Torskiy 

So that’s a great question. There’s quite a few. But first, how a company isn’t meeting the domicile criteria is also important. All the major indices have some exclusion countries for headquarters or incorporation. Usually, these are either countries without a domestic exchange or countries historically known for being more business-friendly for corporate entities. 

However, the list of countries is slightly different across the indices, and how domicile is determined based on the countries and other factors is also different for each index. 

So for example, if headquarters, incorporation, or listing exchange aren’t all the same in the same place, then the Russell will try to establish a country link first using geographic assets, then using geographic revenues. If they can’t, and the company is headquartered in one of their exclusion countries, domicile could default to the country of the company’s most liquid listing. 

On the other hand, depending on where a company is incorporated, the S&P will either only look at headquarters and listing location or go through a list of other factors to determine domicile. 

In fact, most of the major index providers use a list of other factors. So in addition to the S&P, the MSCI and the CRISP — or CRSP — also use other factors in addition to assets and revenues. The major index issuers look at where shareholders, other listings, operations, employees, management, and annual meetings are located — and where investors think the company operates. 

They also look at the company’s history, functional currency, reporting currency, and the accounting method the company uses. And finally, some indices even have specific checks, like the CRISP index checks if the company has an EIN — or an Employer Identification Number — which is required for a company that pays employment taxes or withholds income taxes in the US. 

Overall, when most of these other factors point to a single country, the index classifies the company in that country. 

Jeff Praissman 

Yeah, with all these factors, do the providers ever make exceptions to include companies in certain indices? Say for example, the S&P 500 is one of the most well-known indices out there — are all 500 companies domiciled in the US? 

Nicole Torskiy 

So all the companies in the S&P 500 had to pass the S&P Index methodology screens for US domicile. So they’re considered US companies, but as of April 7th of this year, 28 companies are incorporated, and 22 companies are headquartered outside of the USA. All the non-US incorporations are either in domicile of convenience countries or certain European countries — all included in the S&P methodology as exception locations. 

So most likely, the S&P committee prioritized headquarters and exchange locations, or used that other factors list we talked about earlier, to determine them to be US companies. At the end of the day, the S&P Index Committee has final domicile determination and can review companies on a case-by-case basis. 

Jeff Praissman 

And a lot of founders these days are almost like rock stars, right? We know their name, and they almost take on the personality of the company themselves. Does a founder’s birthplace or residence come into play, even if the company’s listed on the US exchange? 

Nicole Torskiy 

That’s a really interesting question. The S&P, CRSP, and MSCI indices look at company history, and where a company was founded is a part of its history. They’ll also consider where company management is located. So while a founder’s birthplace for index inclusion is not brought into play, where the founder incorporated the company — and where the founder is now, if they’re on the management team — can matter for these other factors. 

I think this question really highlights why looking at all the other factors — like geographic assets and revenue, geographic shareholder distribution, a company’s functional currency, where the annual meeting is held, and even investor perception — is important. Today, we really live in an integrated global economy. So while a startup probably incorporates wherever the founders are living when they start the company, as the company grows and develops a global presence, its operations also evolve. 

These extra rules help bring into play that a company’s operations today might be different than 10 or 20 years ago and help companies that are operating within the US economy be included in US indices. 

Jeff Praissman 

And Rob, the US is a big, diverse country. I’d imagine American companies are headquartered in different regions. Does geographical location play a part in where certain sectors are generally located? And if so, what sectors are in the Northeast, the Midwest, the West, and the South? 

Rob Jankiewicz 

Yeah, that’s a good question. So we actually recently did a study where we looked at headquarter location by state for companies included in the Nasdaq US Benchmark. And this is really just a Nasdaq index representing companies that we would typically consider to be American. 

So when we look at the types of companies headquartered throughout the US, we do see some differences in the sector makeup across geographies. For example, if we split the US up into different regions — like you were saying, North, South, East, West — we see that there tends to be, for example, a larger concentration of healthcare and financial companies in the Northeastern US corridor. 

So think companies like Johnson & Johnson or Merck for healthcare. Or, in the case of financials, most of the larger banks and asset managers such as JPMorgan, Goldman Sachs, Morgan Stanley. 

And then we see a larger concentration of energy companies in the South — companies like ExxonMobil or Chevron. And, perhaps unsurprisingly, we also tend to see a larger representation of technology companies based out of the West Coast. So you can think of some of your popular Magnificent Seven names — stocks like Apple, Microsoft, Nvidia, or Google. 

Jeff Praissman 

What about incorporation? Is it the same breakdown as where these companies are headquartered, or is it different? 

Rob Jankiewicz 

No, so actually the data tells us a different story. When we look at the state of incorporation, for example, we see that over 60% of US companies are actually incorporated in Delaware, despite being headquartered elsewhere. 

But when we take a step back and consider that finding, it’s not really as surprising as one might initially think. This is because Delaware has historically been known for its business-friendly regulatory policies as well as its corporate court system. So, in very simple terms, Delaware tends to be more business-friendly for corporate entities. 

And overall, this is somewhat similar to companies that may intentionally incorporate in certain countries for business-friendly purposes, as we learned earlier on. 

Jeff Praissman 

And Rob and Nicole, this has been great. Are there any other final thoughts you’d like to leave our listeners with? 

Rob Jankiewicz 

So overall, I think determining a company’s home is just one component of an index’s set of rules. Although not all indexes are built the same way, each provides a transparent and systematic set of rules that ultimately play a pretty vital role in the way that people save and generate wealth over the long term. What about you, Nicole? 

Nicole Torskiy 

Index rules are always evolving. Just this year, the Russell and the S&P both slightly updated their domicile methodologies. And the Russell updated their free float definition. It’s an exciting space to be in. 

Overall, index inclusion is really good for a company. It provides long-term holders and can boost turnover and liquidity. So it’s important for issuers to know index rules. Thank you so much for having us on today. 

Rob Jankiewicz 

Yeah, thank you. 

Jeff Praissman 

Rob, Nicole, this is great. Thank you guys for coming by. I want to remind our listeners that you can find lots of great material from Nasdaq on our website. Go to Education, and you can click on contributors from Nasdaq or go to webinars we’ve done with them, articles they’ve contributed to, and, of course, our monthly economic podcast. 

Until next time, I’m Jeff Praissman with Interactive Brokers. Thank you.