SpaceX’s IPO could give index investors a small automatic stake

SpaceX’s planned initial public offering could put the company into many index funds soon after it lists, giving everyday investors exposure whether they picked the stock or not. The practical impact may be limited: based on estimates cited by Of Dollars and Data, SpaceX could represent about 0.11% of a broad U.S. market fund and about 0.68% of the Nasdaq 100.

CNBC reported that SpaceX plans to raise $75 billion in an initial public offering, or IPO, at a $1.77 trillion valuation. An IPO is the first sale of a company’s shares to public-market investors. The deal has put fresh attention on index providers, the firms that decide which stocks qualify for benchmarks followed by exchange-traded funds and mutual funds.

That matters because index funds do not usually pick stocks based on a manager’s judgment. They track a rulebook. If a stock meets the rules for an index, funds tied to that index generally buy it in the required amount.

Index rules are changing for large IPOs

Reuters reported that FTSE Russell sought feedback on a fast-entry rule for U.S. equity indexes ahead of large IPOs. Historically, the Russell 1000 required at least 5% of a company’s total shares to be available for public trading, a measure known as float. SpaceX’s offering is expected to put about 4% of its shares into the public float, according to Of Dollars and Data.

Nasdaq also announced a methodology update for the Nasdaq 100 that allows larger IPOs to enter the index after seven days of trading, rather than waiting for the annual December review.

S&P Dow Jones Indices has taken a different position. S&P Global said there would be “no changes to existing methodology” for its large-cap and megacap indexes. Under that approach, companies such as SpaceX would need to be public for 12 months and meet profitability requirements before they could be considered for the S&P 500 and similar indexes.

What the fund exposure could look like

Index weights are often tied to float-adjusted market value, meaning the market value of shares that can actually trade. If SpaceX raises $75 billion in publicly traded shares, Of Dollars and Data estimated that it would amount to about 0.11% of VTI, Vanguard’s Total U.S. Stock Market ETF, which tracks a U.S. equity market estimated at roughly $70 trillion.

The Nasdaq 100 calculation could be larger. Campbell Harvey, a finance professor, said Nasdaq’s rule change could weight SpaceX at three times its float, or about $270 billion by his estimate. Against a Nasdaq 100 market capitalization of about $40 trillion, that would put SpaceX at roughly 0.68% of the index, according to the analysis.

In dollar terms, that would translate to about $110 of SpaceX exposure for every $100,000 invested in VTI, and about $680 for every $100,000 invested in QQQ, the ETF that tracks the Nasdaq 100.

The debate is sharper because some investors believe the IPO valuation is too high. Aswath Damodaran, the New York University valuation professor, recently valued SpaceX at $1.21 trillion before reviewing its prospectus and $1.22 trillion afterward. That is about 31% below the $1.77 trillion valuation reported by CNBC.

If Damodaran’s valuation proved closer to the long-term market value, Of Dollars and Data estimated the hit would be about 0.03% for VTI investors and 0.21% for QQQ investors. That equals roughly $30 per $100,000 in VTI and $210 per $100,000 in QQQ.

Some critics argue that faster index inclusion could make passive investors provide liquidity to early holders at elevated prices. The counterpoint from the same analysis is that, for a typical diversified investor, the direct dollar exposure appears small relative to broader portfolio choices such as asset allocation, spending and income.

This story draws on original reporting from Of Dollars and Data.