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Whenever markets evolve, big index providers have a choice: follow the rules, or follow reality. Elon Musk’s SpaceX, which starts trading in New York on Friday, has been especially divisive: some indices will include it, and others won’t. But this matters more to the company’s advisers — and its founder — than it does to investors.
Bankers in charge of shifting up to $86bn in SpaceX stock — almost three times as much as ever attempted before — have reason to favour speedy index inclusion. Nasdaq has obliged, altering its rules so that SpaceX will appear in the Nasdaq 100 within weeks of its listing. Russell indices have bowed to SpaceX too, taking up speedy entry rules that parent company FTSE introduced in the UK in 1984 to admit British Telecom.
Those two alone should create roughly $8bn of demand from tracker funds within weeks. But the refusal of S&P Dow Jones to alter its rules will deprive SpaceX of a potential $14bn of additional demand from funds tracking the S&P 500.
Much of the hand-wringing about these decisions ignores a fundamental truth: it’s easier than ever for investors to get what they need without relying on big benchmark indices. There’s nothing stopping Musk’s vast fan base of retail investors from holding, say, an S&P 500 tracker and adding SpaceX via their Robinhood or E*Trade account.
Conversely, ETF providers can offer products that give investors easy access to extra Musk, or none at all. There’s no reason not to create a Nasdaq-100-ex-Musk that excludes SpaceX and Tesla, should enough investors want it. GraniteShares is offering an ETF that delivers twice the inverse of SpaceX’s daily performance.
Even broad indices already involve unusual choices. To pick an S&P 500 tracker over one that follows the Russell 1000 is indirectly a bet that shareholder democracy is a nice-to-have rather than a must; the former lets in companies where public shareholders have no votes, whereas the latter does not.
Sub-indices add further complexity. FTSE Russell bases its categorisation on actual revenue, making SpaceX largely a telecoms play because of its satellite business. In the Nasdaq, Tesla is a “consumer discretionary” stock rather than a technology company such as Alphabet or Meta Platforms. In the S&P 500, the Google and Facebook parents are “communication services”.
If SpaceX really is going to change the world and soar beyond its current $1.8tn valuation — a big if — even an S&P 500 that included it might end up being out of step with the US economy. Musk’s company, based on the relatively small stake it is selling, would only make up 0.1 per cent of the benchmark.
It’s half a century since Vanguard founder Jack Bogle popularised the idea of an index as an investment with his promotion of tracking funds. SpaceX is testing the limits of that strategy. Fortunately, it’s still easy for investors with a smartphone and an opinion to get what they want — and for those less convinced by Musk’s space race, to exclude what they don’t.
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