Whoever coined the phrase “rules are made to be broken” would probably find success working on Wall Street. The two major stock market index providers – Nasdaq and FTSE Russell – have adopted fast-track entry rules that will allow Elon Musk’s SpaceX. to they added to their benchmarks just days after the company had its initial public offering (IPO) on Friday.
Trading under the ticker symbol SPCX, the first SpaceX is expected to be valued at $1.75 trillion. Because it will be the largest IPO in history, millions of Americans with index funds in their retirement accounts will be forced to own a popular but unprofitable company if it is officially added to stock market benchmarks.
What is the rule of immediate entry?
Stock market indices have historically set rules for how long a company must be around and how well it must perform before it can be accepted. For example, the Financial Times Stock Exchange’s Russell 1000, which serves as an average of the 1,000 largest publicly traded companies in the US, previously required companies to wait until a quarterly or semi-annual review before being added to the index.
The flood of high-profile IPOs expected this year has changed that. The Russell 1000 confirmed on May 26 that it has reduced its inclusion rule for companies in its market capitalization of 500 to just five trading days.
The Russell 1000 represents about 93% of the total market capitalization of the entire US equity market. That makes it a reliable barometer for investing capital, with index funds tracking changes in 401(k) plan offerings.
Similarly, the Nasdaq-100, an index of the 100 largest non-financial companies listed on the Nasdaq stock exchange, confirmed on May 1 that it will now allow eligible companies to join its groups after 15 trading days.
SpaceX is offering an unprecedented 30% of its IPO shares to retail investors. The indices’ decisions to adjust their rules were partly motivated by that opportunity, according to Joel Shulman, CEO of ERShares, an asset management and investment firm.
While most companies have reserved between 5% and 10% of their IPO shares for daily investors, Musk’s decision is expected to attract daily supporters and complete SpaceX’s goal of raising $75 billion in its public offering.
Without investing in stocks, Shulman says indices can underperform others and appear “slow out of the gate.” So they bend the rules.
How the SpaceX IPO could be dangerous for investors
With SpaceX’s accelerated inclusion in those benchmarks, managers of funds that mirror the composition of the indices will be forced to buy stocks. But that compulsive buying comes with risks — especially in the stock of an unprofitable company.
For context, its target valuation of $1.75 trillion would make SpaceX 97% larger than a company like Walmart. However, SpaceX generated only $19 billion in revenue by 2025 while operating at a net loss of $5 billion. Last year, Walmart generated $681 billion in revenue – the most of any company in the world – and $20 billion in revenue (known profit).
“SpaceX has high demand but negative revenue,” said Warren Hurt, chief investment officer at wealth management firm F&M Trust.There is an inherent risk of falling asset prices. But what makes this especially dangerous for the passive investor is the weighted cap structure [some indices].”
If the index has a market weight, the largest companies have the largest shares of its performance. Hurt says that given SpaceX’s target valuation, passive investors would become SpaceX’s largest shareholders, which also introduces concentration risk — the potential for large losses due to overexposure to a single investment.
I Nasdaq changed its weighting calculations so that companies like SpaceX that do not issue large shares will not control its performance. But that leads to another problem: The index may trade on the stability of the IPO volatility index.
“The fact that it’s nearly impossible to value assets with negative earnings and an unknown future revenue stream makes price discovery more challenging,” Hurts said. “I would expect a volatile opening day for this IPO.“
For retirement savers in particular, that volatility can lead to follow-on return risks — the risk that withdrawing during periods of market underperformance before retirement can hurt your overall returns for years to come. That volatility could be exacerbated by forces beyond the control of everyday investors, such as insider trading if SpaceX goes public.
However, it may be offset by strong investor appetite for SpaceX shares, as well as demand for thematic exchange-traded funds (ETFs) and institutional buyouts. Shulman notes that there are currently 22 space-themed ETFs that are likely to buy SPCX shares.
“There is a lot of money that will be chasing SpaceX, especially capital and retail money,” he said. “So I expect a strong IPO.”
Should retirees invest in SpaceX?
Some retirement plans are taking the first step. Denmark’s $25 billion public-sector pension fund, AkademikerPension, announced on May 29 that it had formally shut down SpaceX ahead of its IPO, saying that “an excess of power prevents the board from exercising meaningful oversight and makes it impossible to remove Musk against his will.”
However, Shulman – who runs the Private-Public Crossover ETF, a fund with about 13% exposure to SpaceX – downplayed the pension fund’s decision. He argues that SpaceX is a better value than other places in the market, especially when Starlink is included. (That business segment dominates the space-based broadband market and has more than 10 million subscribers.)
Shulman adds that for those nearing retirement, owning stocks or getting exposure to them through index funds can be one of the last opportunities for big gains before withdrawals start to deplete retirement account balances.
“A lot of people of retirement age are excited about SpaceX,” he says. “Some of our investors think this is their last chance to find something that will make them happy.”
As retirement approaches, it is wise for retirees to reduce their risk exposure by rebalancing. But like any investment, you shouldn’t put all your eggs in one basket.
Despite the short timelines, people preparing for retirement can still take advantage of growth opportunities, even if they are cautious and intentional.
“I see more excitement in this IPO than anything in years,” Shulman said. “Do I think a low-income person should put all their money into this? Of course not. But some people think it’s a way to get an extra pop before their retirement age.”
