SpaceX in your index fund, explained

A $60B Vote of Confidence

The inclusion of SpaceX in the Nasdaq-100 index fund has sparked concerns about the stability of these investment vehicles. But what does it mean for the company and its investors? To understand the implications, it's essential to delve into the world of index funds and how they work.

Index funds are investment vehicles that seek to match a specific market benchmark, such as the S&P 500 or the Nasdaq-100. They were popularized by Burton Malkiel's 1973 book A Random Walk Down Wall Street, which argued that the past prices of a stock don't predict the future and that it's difficult to beat the overall market returns over a long period.

The strategy of index fund investment has been endorsed by Warren Buffett, who has suggested that the average investor is best served by putting 90 percent of their money in a very low-cost S&P 500 index fund. And they are very popular! In 2024, the assets under management in passive investing, such as index funds, outpaced that of active funds, according to Elise Ryan of State Street Investment Management.

So what's the concern about SpaceX? Shortly before the company went public, the Nasdaq changed its rules for the Nasdaq-100, so that a newly public company that's large enough can join the benchmark on its 15th day of trading. That rule change was requested by SpaceX, Reuters reported.

When SpaceX joined the Nasdaq-100, index funds had to buy in. Interestingly, at close on July 6th, the stock was down. There's some structural reason for that - namely, that everyone knew the index funds would have to buy in, and so banks and hedge funds most likely did some fun trades. Index rebalancing funds made out like bandits.

Finance is fascinating and full of monsters. There's reason to believe that the index fund buying is part of the reason SpaceX had its initial IPO pop, according to research from Harvard Business School. What's more, SpaceX is the initial entry into indexes for a number of expected mega-IPOs. Anthropic and OpenAI are expected to make their debuts later this year. Also, people don't like Elon Musk.

Why Index Funds Matter

Index funds are a crucial part of the investment landscape. They provide a way for investors to bet on the market as a whole, rather than picking and choosing individual stocks. And they're popular - in 2024, the assets under management in passive investing, such as index funds, outpaced that of active funds.

But what does the inclusion of SpaceX in index funds mean for the company and its investors? Some degree of price stability. New IPOs often fluctuate wildly. For instance, Facebook's shares dropped 25 percent the Monday after its 2012 IPO, tripping breakers to halt trades.

Beyond the fluctuations from the market itself, a lot of people will soon be able to sell SpaceX shares that aren't yet on the market. SpaceX employees are subjected to 'lockup periods,' where they can't immediately cash out and sell their stock following the IPO. Those periods are going to expire, and doubtless some people will want to sell shares.

The index funds are likely to 'help absorb some of the selling,' thus keeping the price from dipping too low, according to The Wall Street Journal.

The Road Ahead

The inclusion of SpaceX in index funds has significant implications for the company and its investors. As the company's market cap continues to grow, it's essential to understand the mechanics of index fund investing and how they impact the company's stock price.

The company has a market cap of more than $1.5 trillion as of this writing, which is obviously enormous. But the IPO sold less than 5 percent of the company's shares. Because of the way the Nasdaq adjusts its index, SpaceX will be treated like a much smaller company.

But remember, next month more SpaceX shares will be released from lockup. People with 180-day lockups can sell more shares than were initially sold in the IPO after SpaceX publishes its second quarter financial results, notes Bloomberg's Matt Levine. Those results are expected in mid-August.

That will make it more important in those index funds - though whether the price will fluctuate much is anyone's guess, as short sellers are also anticipating the lockup releases. These market mechanics may explain some of the stock's short-term price fluctuation, even though the company hasn't had much major news occur.