New York
SpaceX is set to officially join the Nasdaq 100 index on Tuesday, giving investors new exposure to the stock while triggering billions of dollars in automatic purchases by index funds.
SpaceX’s inclusion in the Nasdaq 100 marks a new chapter in the stock’s closely watched post-IPO journey. The index is one of the world’s most widely followed technology benchmarks, and also underpins hundreds of funds and investment products designed to track its performance.
There are over 200 investment products with $800 billion in assets that track the Nasdaq 100. Funds that track the index have to buy SpaceX in order to continue mirroring its performance. That means investors who hold Nasdaq 100-related funds will automatically gain exposure to SpaceX.
Recent changes to index methodologies to accommodate mega-sized initial public offerings have enabled SpaceX shares to be fast-tracked into different stock market indexes.
SpaceX has already joined benchmark indexes offered by FTSE Russell and MSCI, two other major index providers. Meanwhile, S&P Dow Jones Indices did not change its methodology rules, so SpaceX will not be eligible to join the S&P 500 for at least a year.
The Nasdaq 100 is an index tracking the 100 largest non-financial stocks traded on the Nasdaq exchange. SpaceX debuted for trading on the Nasdaq and Nasdaq Texas exchanges on June 12.
The Nasdaq 100 is a tech-heavy index and often includes companies with high growth prospects.
The Nasdaq in May announced updated eligibility requirements for a stock to be included in the Nasdaq 100. The changes allow stocks to be eligible to join the index 15 days after an IPO, compared to a previous wait period of at least three months.
“All the different index providers needed to look at their rules and make sure they were fit for purpose, taking into consideration that SpaceX is the largest IPO in history,” said Peter Haynes, head of index and market structure research at TD Securities.
While SpaceX’s market value of more than $2 trillion makes it the sixth-largest publicly traded stock in the United States, it enters the Nasdaq 100 with a significantly smaller weighting and influence.
Nasdaq’s index methodology weights stocks based on the amount of shares available for trading. SpaceX went public with less than 5% of its shares available for trading, meaning its weight in the index will start out much smaller than its true market value.
If you own $100 worth of the Nasdaq 100, you would own about $1 worth of SpaceX shares. SpaceX’s weighting in the Nasdaq 100 could increase significantly over time as more shares become available for trading as lock-up periods expire and the supply of shares on the market increases.
As SpaceX becomes a feature of more indexes, some investors might want to limit – or outright avoid – exposure to the stock.
For some investors, CEO Elon Musk has become a polarizing figure. Other investors might be skeptical of SpaceX’s valuation. Analysts at Morningstar value the company at half of its IPO debut, with one forecast suggesting intense volatility.
Since SpaceX will not be eligible for inclusion in the S&P 500 for at least a year, buying the S&P 500 would be one of the simplest methods for those investors who wish to avoid SpaceX. (The S&P 500 does, however, include Tesla, Musk’s electric vehicle company).
The blue-chip Dow doesn’t include SpaceX or Tesla. Investing in international index funds to avoid US companies entirely is another strategy.
Different individuals have different reasons for investing. There are pros and cons to trying to build strategies based on avoiding specific companies, noted Warren Hurt, chief investment officer at F&M Trust.
Individuals must weigh what they’re comfortable investing in against the possibility of missing out on returns by avoiding high-growth tech companies. Ultimately, it’s a bet, and a personal choice.
“I think the beauty of what our financial markets offer is there’s a way to really build any strategy that you like,” Hurt said. “You’ve got to decide what allows you to sleep at night.”
For investors eager to trade SpaceX shares, there are various products available to buy and sell.
Exchange-traded funds, or ETFs, that aim to double SpaceX’s gains (but on the downside, also its losses), are hitting the market.
Of course, investors can also buy and sell SpaceX shares directly.
SpaceX shares are up almost 20% from the IPO target price of $135 a share. Still, SpaceX shares are down 21% from their closing peak shortly after the IPO.
Analysts expect the stock price volatility to continue as investors in upcoming quarters gauge the company’s earnings and forecasts.
In order to eventually be included in the S&P 500, SpaceX would need to register four quarters of profits. It took Tesla 10 years to join the S&P 500.
Meanwhile, SpaceX’s weight in the Nasdaq 100 and its share price performance will be under a microscope. The larger its weight in the Nasdaq 100, the more influence it will have on the index’s performance.
“There are going to be a lot of shares hitting the market in the next six months, so there’s going to be a lot of supply,” Hurt said. “The price volatility isn’t over. If anything, it’s probably just beginning.”
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