SpaceX IPO creates $2.5T index divergence for passive investors

SpaceX's $75 billion initial public offering has created a rare divergence in passive investing benchmarks, with total-market indexes adding the Elon Musk-led company days after its June 12 debut while the S&P 500 index will wait at least 12 months.

The stock closed its first trading day up roughly 20% from its IPO price, giving it a market capitalization of about $2.5 trillion — placing it among the largest U.S. companies. But which index an investor's fund tracks determines whether they now hold SpaceX shares.

"The divergence in index inclusion rules means passive investors face a choice they didn't have to make before," said Priya Mehta, an equity market structure analyst who previously worked in ETF analytics at Vanguard. "Total-market funds will carry SpaceX exposure almost immediately, while S&P 500 trackers won't touch it for a year."

The Vanguard Total Stock Market ETF, which tracks the CRSP US Total Stock Market Index, can add newly public companies after just five trading days. The Nasdaq-100 index can include SpaceX after 15 trading days under fast-entry rules amended ahead of the IPO. The S&P 500, by contrast, maintains a 12-month waiting period and profitability criteria for new listings.

SpaceX sold approximately 555.6 million shares in its offering, representing slightly more than 4% of its outstanding shares — an unusually low float. Morningstar analyst Zachary Evens estimates the float is unlikely to exceed 50% after a year, limiting the stock's actual weighting in any index. Most indexes adjust a company's market value by its freely tradable shares, meaning SpaceX's influence on fund returns will remain muted initially.

The practical impact on returns has historically been small. Over the past decade through Thursday, the Vanguard S&P 500 ETF returned an annualized 15.6% while the total-market version returned 15.1%, according to FactSet data. Over the last two years, the gap narrowed further: 18.9% for the total-market fund versus 18.5% for the S&P 500 tracker.

IPO performance varies significantly by vintage. Companies that went public in 2021 broadly underperformed the market, while 2012 IPOs — the year Meta Platforms debuted — beat the broader market over the following three years. Large IPOs with at least $1 billion in pre-IPO sales have historically matched the market's performance over three years, while unprofitable tech companies with $100 million or more in sales beat the market by more than 11% over the same period, according to data compiled by University of Florida finance professor Jay Ritter.

SpaceX's staggered lockup period adds another layer of complexity. Insiders can begin selling after the company's first quarterly report in August, with additional unlock dates at 70, 90, 105, 120, 135 and 180 days. Elon Musk cannot sell his shares for 366 calendar days. The company's prospectus also warns of potential share dilution to fund AI data center expansion and acquisitions.

For passive investors tempted to switch indexes to capture or avoid SpaceX exposure, the exercise may prove self-defeating. The stock's price-to-sales ratio stood at 142 as of June 16, and its limited float means even total-market funds will carry a weighting of 1% or less initially, according to Vanguard.

This article is for informational purposes only and does not constitute investment advice.