Sitting out the SpaceX IPO? Why that’s hard to do

“Wall Street has been fixated on the stock market debut of Elon Musk’s SpaceX. The rocket-and-AI company’s initial public offering on June 12 is set to be the largest in history. For many regular investors whose main holdings tend to be in publicly traded securities, this will be the first opportunity to include SpaceX in their portfolios. Even those who would prefer to sit on the sidelines are likely to have some exposure. That’s because stock funds that track the Nasdaq-100 and other major indexes will be required to add SpaceX to their holdings. And due to recent rule changes, some indexes will include SpaceX much sooner than they would have in the past. Here’s what to know about how everyday investors might be affected by the SpaceX IPO. How will SpaceX wind up in many investors’ portfolios? Index-tracking funds have proliferated for decades by offering market-like returns at a lower cost. When an IPO such as SpaceX’s is added to a major benchmark, index funds are mandated to follow by buying the shares. SpaceX won’t be included in the most prominent stock index, the S&P 500, immediately after the IPO. That’s because the index’s owner, S&P Dow Jones Indices, recently opted to stick with its policy requiring a waiting period of at least one year for inclusion — and only after a newly listed company has met certain criteria, including profitability. SpaceX could be added to other S&P indexes. But other index owners including Nasdaq and FTSE Russell are set to add SpaceX within weeks of the public listing, thanks to recent rule changes that give investors faster access to high-profile stocks. Investment management companies such as Vanguard and BlackRock whose funds track stock indexes will be forced to buy SpaceX shares, adding the company to the personal investments and retirement accounts of tens of millions of Americans. Plenty of investors will probably welcome having a stake in Musk’s company for his ambition to dominate transformative industries including AI, satellite communications and rockets. But SpaceX’s eye-popping valuation target of $1.75tn – almost 100 times the company’s sales – might give some investors pause. What are the new rules that fast-track the inclusion of mega IPOs into stock indexes? Nasdaq changed its rules so SpaceX could join the Nasdaq-100 index — a cohort of the largest non-financial companies — after just 15 trading days, down from a three-month minimum. FTSE Russell adopted a similar approach, shortening the waiting period to five trading days. The changes highlight the pressure on index providers to adapt as companies stay private longer and go public at much larger valuations. Supporters of fast-tracking new listings say indexes should include big companies as quickly as possible to reflect the market as it is. When the most transformative businesses sit outside benchmark indexes for months after going public, they say, the indexes risk looking obsolete. Skeptics of the rule changes say the waiting periods allow share prices to settle after what can be a volatile post-IPO period. For funds designed to track indexes, a rapid inclusion could expose them to greater volatility and force them to buy shares before reliable market pricing has been established. The portfolios of everyday investors might suffer as a result. Is the change to fast-entry rules unusual? This isn’t the first time Nasdaq has revised its index methodology for big IPOs. The exchange modified its rules in 2012 to secure the listing of Facebook, now Meta Platforms Inc. The recent change drew criticism from rival New York Stock Exchange for seemingly tailoring the rules to land SpaceX’s listing on the Nasdaq exchange. Nasdaq said no rules were broken in winning the SpaceX listing. How much of SpaceX stock buys will be ‘forced’? One issue market participants focus on after an IPO is the amount of “forced buying” – the need to acquire the stock in order to continue mirroring an index’s performance. According to estimates from Bloomberg Intelligence analysts James Seyffart and Rob Du Boff, demand from funds benchmarked to the Russell 1000 and Nasdaq-100 will make up the equivalent of 7% of SpaceX’s $75bn offering. How might the rule changes affect ordinary investors? When an IPO arrives in the public market, individual investors can decide whether to invest in it. By accelerating the stock’s inclusion into the Nasdaq-100 and other prominent benchmarks, index providers make the decision on behalf of investors. Since many index-tracking funds sit inside brokerage and retirement accounts, millions of investors will own SpaceX whether or not they deliberately chose to. To make room for SpaceX, some stocks will either be dropped from the index or see their representation fall. SpaceX’s initial index weight is likely to be small due to its low float — the amount of stock available to trade. But an eventual increase in float could make it one of the largest index constituents. That could amplify the risk that investments will be over-concentrated in the tech sector when the market is already dominated by a handful of giants known as “Magnificent Seven.” What do the rule changes mean for early SpaceX investors? A faster entry to major indexes adds an extra source of demand for the IPO. As lockup periods restricting stock sales expire for venture capital firms, company executives and employees who held pre-IPO shares, SpaceX’s free float will rise accordingly, leading to an increase of its index weighting. That in turn will cause passively managed index-linked funds to boost their holdings in the stock, essentially providing early owners ample opportunity to sell.

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