Will the SpaceX IPO Break Your Index Funds?

When my Father-in-Law asks a timely question about passive index fund investing, it surely means many of you have the same question.

And it’s regarding a unique scenario unfolding due to the upcoming SpaceX IPO on Friday, June 12th.

It is the largest IPO in history, and it’s going to impact your retirement portfolio.

How much is this something for us to worry about? It sounds like those index funds are forced into a ‘buy-high-sell-low’ scenario.

The article that prompted the question: “How $30 trillion in passive money gets forced into one stock“. I’m not going to link to the source or name the author because I can’t verify it’s by a real person.

Not to mention the headline is grossly misleading ($30 trillion is not relevant in this context whatsoever).

The article — which repeats widespread commentary leading into the SpaceX IPO — highlights rule changes to large indexes such as the Nasdaq 100 that will cause “forced” or “mechanical” buying shortly after the IPO.

The issue is rightfully getting attention because SpaceX made early Nasdaq 100 inclusion a condition for choosing the Nasdaq as its listing exchange over the NYSE.

The index changed the waiting period to 15 days from three months, and eliminated the 10% float requirement.

FTSE Russell and MSCI indexes are also allowing early entry for SpaceX, and the upcoming Anthropic and OpenAI IPOs (possibly arriving in Q3 or Q4).

Due to the changes, 15 days after the SpaceX IPO, passive mutual funds and ETFs like the popular Invesco QQQ ETF, which is tied to the index, will be forced, by their own rules, to buy SpaceX stock at whatever price it is trading at.

SpaceX is already richly valued heading into the IPO.

And if SpaceX “pops” (that’s parlance for a price spike) even further after the IPO, the indexes will indiscriminately buy at overvalued prices, raising the market cap, and possibly leading to what ​Intropic​ calls a “reflexive feedback loop” — as the market cap grows, the funds have to keep buying, further inflating the market cap.

The “pop” is somewhat expected because the initial IPO float (shares trading in the open markets) will only be around 4%-5% of the total outstanding SpaceX shares (pre-IPO investors own roughly 54%, and Elon Musk owns roughly 42%, though 85% of voting power).

4% is relatively small, even though it equates to about $75 billion or 555.6 million shares.

But that may not be enough shares to fill investor demand, initially. Especially since 20%-30% of shares are anticipated to be allocated to retail investors, who tend to hold instead of flip shares.

Moreover, the forced or mechanical buying will kick in at 5 days and accelerate at the 15-day mark.

One estimate by Intropic, says the passive index funds could buy up to 30% of the already small initial float.

At about the 70-day mark and continuing until the 180-day mark after the IPO, the other 54% of shares will begin to float as staggered lockup periods expire and more shares become eligible to sell in the open market.

At 365 days, Elon is eligible to sell his shares (though he probably won’t), and all 13 billion shares will be eligible to trade.

This first-time scenario will test the passive index investing market infrastructure and traditional IPO process (widely considered to be broken already).

When the lockup periods expire, and the valuation is still high, heavy selling by pre-IPO investors will likely commence, causing the price to fall, leaving passive index fund holders with losses.

You’re likely hearing the phrase “exit liquidity” this week in the context that DIY investors will buy IPO shares at high prices.

That’s how venture capital and IPOs work. It’s not more negative for SpaceX; it’s always this way.

The difference here is that this deal is designed to send more shares to retail investors, because that’s what Elon has promised to his fans and Tesla shareholders.

SpaceX’s size will amplify everything.

The real issue is when IPO stocks soar at the open and investors buy. Many DIY investors will buy right away without understanding valuation.

They just want to own SpaceX at any cost. That’s dangerous.

Many of you don’t buy individual stocks. The SpaceX IPO shouldn’t change that.

But if you’re thinking about buying SpaceX stock when it opens for trading, don’t do it if it’s soaring above its IPO price.

Wait for the lockups to expire and for trading to settle, which could take six to twelve months.

Note: This is not a recommendation to buy or sell SpaceX. Evaluate all potential investments against your long-term objectives.

The S&P 500 index did not change its rules for SpaceX, so mutual funds and index ETFs like VOO and SPY won’t be impacted by any of this until after about a year.

But the very popular total market funds like VTI, VTSAX, ITOT, and FSKAX will all be buying SpaceX shares after five days.

Here’s my take on the impact of index funds.

Does the forced passive index buying concern me as a DIY retirement investor? Will I sell VTI and buy VOO as that article suggests?

No. SpaceX will still only be a relatively small portion (~2%) of those large funds.

Even large price moves on a single large holding will get absorbed. Stock sale proceeds from one stock flow into others.

Plus, there’s plenty of SpaceX valuation skepticism, which should keep some downward pressure on the stock.

If the market is overvalued, it will correct eventually as it always does. Trying to guess when that will happen is a loser’s game.

So hold your passive index funds through and through.

Individual stocks fluctuate, and SpaceX is no exception.

I don’t think the SpaceX IPO will break the market or index funds.

But it will test market foundations, some of which may be wobbly.

The SpaceX IPO could be deemed successful on Friday and in the coming weeks. Yet performance and investor sentiment could also turn negative over the coming months.

On the plus side, a successful SpaceX IPO could unlock the long-stagnated IPO markets, bringing more of the most innovative private companies into the index funds many of us own.

Companies are staying private longer (led in part by SpaceX), and most investors miss out on the private gains. This deal could help to reverse that.

More IPOs could help get the next SpaceX or Anthropic into more of our portfolios at lower valuations, reminiscent of the days of Amazon, Google, Tesla, Apple, and Microsoft.

This is the overarching theme of my other website, newsletter, and podcast, Access IPOs. Ordinary investors want more ownership access to the best companies of our time. Too often, we’re locked out.

Even if you’re not interested in tech or IPOs, SpaceX is too consequential to ignore — most of us will be owners by next week.

Craig Stephens

Craig is a former IT professional who left his 19-year career to be a full-time finance writer. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his investment portfolios. Craig studied Finance at Michigan State University and lives in Northern Virginia with his wife and three children. Read more.