SpaceX's initial public offering on Friday is poised to be the biggest ever, but finance experts warn that retail investors can access the company without buying the IPO directly. At $135 per share, SpaceX would be valued at nearly $1.8 trillion, making it the seventh-biggest U.S. company by market capitalization. The IPO is generating buzz, but experts caution that stocks are often unprofitable in the early period after an IPO, and concentrated positions in individual companies can create acute volatility for unwary investors. Multiple mutual funds and exchange-traded funds already hold SpaceX positions or will add the stock within days of the public listing, offering diversified exposure. Index providers including Russell, FTSE, CRSP, MSCI, and Nasdaq have established timelines ranging from five to 15 trading days for adding mega-cap IPOs to their indexes, while the S&P 500 requires at least 12 months of public trading and profitability.
Index Funds Add SpaceX Within Five to 15 Trading Days
Many index fund investors will gain SpaceX exposure within days or weeks following the IPO, according to Zachary Evens, an analyst of passive strategies at Morningstar. The Russell U.S. indexes can add mega-cap companies like SpaceX after five days of trading, Evens said. The same five-day timeline applies to indexes provided by FTSE, CRSP, and MSCI, according to Vanguard Group.
Investors with shares in index mutual funds or ETFs that track these indexes, such as the Russell 1000 or CRSP U.S. Total Stock Market Index, will own a piece of SpaceX after that five-day period, Evens said. Examples of such funds include the iShares Russell 1000 ETF (IWB) and the Vanguard Total Stock Market ETF (VTI).
MSCI has a 10-day timeline, while Nasdaq adds a stock to the Nasdaq 100 index 15 trading days after its IPO if it is among the top 40 stocks, as SpaceX will be. Some index providers, including Nasdaq and FTSE Russell, relaxed their inclusion policies this year to fast-track the adoption of mega-IPOs into their respective indexes.
Sen. Elizabeth Warren, D-Mass., published a letter to index providers on Thursday questioning those fast-track policies. "This wave of changes by your firms raise significant investor protection concerns, particularly amid reports that SpaceX lobbied for 'quicker entry into your indexes,'" Warren wrote. "For the millions of Americans invested in index funds, the changes may lead to the automatic purchase of billions of dollars of SpaceX stock without them having any say in the matter."
S&P 500 Requires 12 Months and Profitability for SpaceX Inclusion
Investors in the S&P 500 may have to wait years for SpaceX to join the index. The provider, S&P Dow Jones, requires companies to be public for at least 12 months to be eligible for inclusion in the S&P 500. Additionally, the company must be profitable — it must post positive earnings for its most recent quarter and over the last four quarters combined, Evens said.
Tesla (TSLA) notably took about 10 years to be added to the S&P 500 after its IPO, Evens said. "With SpaceX, the profitability requirement is likely to hold up their inclusion for a number of years," said Jay Ritter, director of The IPO Initiative at the University of Florida.
However, this timeline does not apply to all S&P indexes. The S&P Total Market Index can include SpaceX after five trading days, according to Vanguard. SpaceX would likely account for a small piece of overall index mutual funds and ETFs — roughly 0.1% of the Vanguard Total Stock Market fund and about 0.6% of the Invesco QQQ ETF, which tracks the Nasdaq 100, Ritter said.
Active Funds Hold Large Pre-IPO SpaceX Positions
Investors in actively managed mutual funds and ETFs can gain SpaceX exposure without a lag. Some of these funds have established large pre-IPO positions that dwarf those of index funds. Eight active funds — including mutual funds, ETFs, and closed-end funds — held positions in SpaceX that exceeded 10% of their net asset value, according to Morningstar data as of June 1.
Those funds, from most to least exposure, are: the Baron Partners Fund, Baron Asset Fund, Baron Focused Growth Fund, Baron Global Opportunity Fund, The Private Shares Fund, Baron Opportunity Fund, ERShares Private-Public Crossover ETF, and Ark Venture Fund, according to Morningstar. SpaceX accounted for 37% of assets in the Baron Partners mutual fund, according to Morningstar.
However, those holdings could get diluted if investors crowd into such offerings. "Paradoxically, the more popular these [funds] become with investors, the greater the possibility that influx of assets will dilute the SpaceX weighting, thereby potentially lessening the very thing it's being so sought for in the first place: its potential to contribute to performance," Jeffrey Ptak, managing director for Morningstar Research Services at Morningstar, wrote last week.
Investors who hold active funds with large SpaceX positions are more vulnerable to big swings in stock price. Active funds also tend to be more expensive than index funds, which is one reason why index funds tend to outperform their actively managed counterparts over the long term.
Direct IPO Purchase Carries Higher Volatility Risk
The cheapest and most direct way of buying SpaceX would be to purchase the stock on an exchange after it lists on Friday, Evens said. But buying individual stocks generally carries greater financial risks than buying a basket of diversified securities, and those risks are heightened in the early days of an IPO, Ritter said.
"The most likely outcome with the SpaceX IPO is it will jump on the first day, probably underperform the market during the next year and during the next three years," said Ritter, citing historical precedent. With any stock, there is a chance of earning a big payoff, but the probability of losing money on an individual security is higher than the probability of gaining money, Ritter said.
Because the SpaceX valuation is already so high, "the probability of a really big gain, in my opinion, just is not there," he said. There could be benefits to holding single stocks — investors who lose money amid volatility can sell that holding and use the loss to offset any capital gains taxes on their winning investments, a strategy called tax-loss harvesting.
FAQ
How quickly can index fund investors access SpaceX stock after the IPO?
Index fund investors can gain SpaceX exposure within five to 15 trading days after the IPO, depending on the index provider. Russell, FTSE, CRSP, and MSCI add mega-cap companies after five days of trading, while MSCI has a 10-day timeline and Nasdaq requires 15 trading days for inclusion in the Nasdaq 100.
What are the requirements for SpaceX to join the S&P 500?
S&P Dow Jones requires companies to be public for at least 12 months and to be profitable — posting positive earnings for the most recent quarter and over the last four quarters combined. With SpaceX, the profitability requirement is likely to delay inclusion for a number of years, according to experts.
Which active funds hold the largest pre-IPO positions in SpaceX?
Eight active funds held SpaceX positions exceeding 10% of their net asset value as of June 1, according to Morningstar. The Baron Partners Fund has the largest exposure at 37% of assets, followed by Baron Asset Fund, Baron Focused Growth Fund, Baron Global Opportunity Fund, The Private Shares Fund, Baron Opportunity Fund, ERShares Private-Public Crossover ETF, and Ark Venture Fund.
