This article mentions funds that have an issuer-initiated rating and/or track a Morningstar Index. For full disclosure information, please refer to the specific funds, which are demarcated with a * symbol, listed below.
Something odd is going on. Space Exploration Technologies SPCX is set to receive a much higher weighting in several notable indexes just as its stock price sputters.
Major stock indexes like the Russell 1000, Morningstar US Total Market, and MSCI USA weight holdings by their free-float-adjusted market capitalization. This means if company A and company B have the same total market cap, but company A has a higher float percentage (shares freely traded), company A earns a higher weighting than company B in those three indexes.
This is why SpaceX, with its $1.4 trillion total market cap at the end of July, earned the same 0.08% weight in the Russell 1000 as $57.0 billion Delta Air Lines DAL.
The situation will change very soon. The space and artificial intelligence company’s weight in the index is set to at least double, no matter if its stock price rises or falls between now and each index’s next rebalance date.
Over 900 million shares of SpaceX became eligible for sale by insiders on Aug. 6, following the company’s first earnings release. This is 143% of the 639 million shares available shortly after its IPO. All else equal, SpaceX’s float-adjusted market cap will increase by 2.43 times. This would propel the stock into the Russell 1000’s top 100 holdings and earn it roughly a 0.20% weighting—near CVS Health CVS, Pfizer PFE, and Deere & Company DE.
Index Fund Implications
Index funds will be forced to buy more SpaceX stock just as insiders are selling. This helps balance the supply and demand for these shares, but it also means it may be hard to determine the stock’s true value and trading equilibrium in the short term. Seasoning periods can help many indexes navigate volatile price movements while the market sorts itself out. A seasoning period, or waiting period, prevents index funds from buying a stock shortly after its IPO to avoid volatile or unbalanced trading in the weeks and months following the IPO.
However, for large IPOs like SpaceX, many indexes waive the seasoning period to achieve a more accurate representation of a given market segment. As a result, iShares Russell 1000 ETF IWB, Vanguard Morningstar US Stock Market ETF
VTI
, and Invesco MSCI USA ETF PBUS all bought SpaceX shortly after its June high and continued to own the stock through its July lows and into August. The Nasdaq 100, which underpins Invesco QQQ, added SpaceX to its roster on July 7.
Despite declining by 31% in July, indexes will scale up their SpaceX position at their next scheduled rebalance. This flies in the face of market-cap weighting, which is designed to automatically size positions based on a stock’s size. It’s an efficient weighting approach that sees weights rise and fall with stock price movements.
Weights can also rise and fall with changes to a stock’s float. But that’s usually uncommon for companies that have been trading publicly for years. Many companies have float ratios well above 90%, making their float-adjusted market cap roughly equivalent to their total market cap. SpaceX and a handful of other founder-led companies have lower float ratios, which means large share releases can materially impact their position in many indexes.
Here’s when investors can expect each major index to resize its SpaceX position based on their next scheduled rebalance. Note that S&P will not add SpaceX to its flagship S&P 500 index until June 2027 at the earliest because of its mandatory one-year seasoning period. Profitability requirements may further delay the stock’s entry.
Share releases will also impact SpaceX’s public float and therefore its size in each of the indexes listed above. Below are upcoming share releases, the stock’s possible float percentage following each release, and its estimated float-adjusted market cap. Float-adjusted market caps are subject to change based on where SpaceX stock trades on each release date.
Assuming July 31 prices, SpaceX should receive roughly a 0.70% weight in the Russell 1000 index after its Dec. 11 rebalance. Its weight in the other indexes following their respective rebalances will be based on where its float-adjusted market cap stands on each rebalance date.
The Long Game
Short-term stock movements should matter little to index fund investors. SpaceX’s wild swings in its first few months of trading are not unique to the stock, but its total size and public attention have brought little-known index rules into focus. Even with upcoming share releases, SpaceX is not expected to make up more than 1% of major US market indexes in the near future. So, price swings will have relatively little impact on an index fund’s overall trajectory.