Why Your S&P 500 ETF Could Rapidly Include SpaceX

Elon Musk's SpaceX could soon commence an initial public offering (IPO), and if that happens, it would be one of the most anticipated and largest such transactions in history.

The word on the street is that the Starlink owner is looking to raise as much as $50 billion, or nearly double the amount raised in the largest IPO on record. It's also rumored that SpaceX could debut with a market capitalization of $1.5 trillion, potentially putting it in rarefied air. As of March 13, just 11 U.S.-based companies sport market values of $1 trillion or more.

When the SpaceX IPO blasts off, it could be a quick addition to these ETFs. Image source: Getty Images.

Assuming SpaceX debuts with a market capitalization of $1.5 trillion or more, that lofty valuation could reverberate beyond the stock into some of the world's largest exchange-traded funds (ETFs). Here's why.

SpaceX could quickly join the S&P 500 and these ETFs

Age isn't a factor in how long it takes a stock to be included in the S&P 500, so that works in SpaceX's favor in terms of joining this widely followed benchmark. But there are other criteria for entry. Those factors include being based in this country, trading on a major U.S. exchange, four consecutive quarters of profitability, and a minimum market capitalization of $22.7 billion.

Check, check, check, and check for SpaceX. As a result, S&P Dow Jones Indices, the company behind the S&P 500, is reportedly considering rules changes that would pave the way for Musk's company to quickly enter the S&P 500.

If that happens, famous ETFs such as the Vanguard S&P 500 ETF (NYSEMKT: VOO), the iShares Core S&P 500 ETF (NYSEMKT: IVV), and the State Street SPDR S&P 500 ETF (NYSEMKT: SPY) could quickly become home to SpaceX shares. Oh, and by the way, those are the three largest ETFs trading in the U.S.

With SpaceX and S&P 500 ETFs, size matters

It's not only interesting that S&P could possibly modify the rules to quickly include SpaceX in one of the world's most widely followed stock indexes, but the prominence that the stock could take on in the index is also noteworthy.

Interestingly, if SpaceX came to market today with a $1.5 trillion market value, it would be slightly ahead of Tesla, Musk's other company. Obviously, it's a theoretical exercise, but if SpaceX joined the S&P 500 and the aforementioned ETFs today, it would bump Tesla down to the 10th spot while knocking Berkshire Hathaway out of the top 10.

And don't forget that when SpaceX joins the S&P 500, all the active and index funds that track the index must buy the stock, potentially paving the way for a short-term spurt.

Todd Shriber has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway, Tesla, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.