A Big Change Could Be Coming to the S&P 500. Here's What That Means for Investors

SpaceX, the aerospace and AI company founded by Elon Musk, will go public on June 12. It could be valued at $2 trillion, making it the biggest IPO in history. Many investors also believe it could join the S&P 500 and fundamentally shift the index's composition.

Could SpaceX be added to the S&P 500 within the next two years? Let's review what its inclusion in the index might mean for the stock and S&P 500 ETFs.

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What would it take for SpaceX to join the S&P 500?

The S&P 500 includes the 500 most prominent companies in America, but it doesn't add companies to the prestigious index simply because they have massive market caps. To join the S&P 500, a company must satisfy three rigid requirements.

First, a company must be publicly traded for a full year before it can even be considered for inclusion in the index. Second, it must post a profit in its most recent quarter and be profitable on a cumulative basis over the past four quarters. Lastly, it must have a public float of over 10%.

SpaceX doesn't satisfy any of those requirements yet. The earliest it can be considered for inclusion in the index will be next June. It's also unprofitable, since losses from its space division and the newly integrated AI business (which owns X and xAI) wiped out Starlink's profits. It's only offering 3%-4% of its shares in its IPO, which puts it well below the 10% threshold. So while SpaceX might eventually join the S&P 500, it won't happen in 2026 or 2027.

What would an inclusion in the S&P 500 mean for SpaceX?

If SpaceX joins the S&P 500, it would automatically be added to any index fund or ETF -- including Vanguard's S&P 500 ETF (NYSEMKT: VOO). Therefore, any retail or institutional investors buying those funds would gain exposure to SpaceX and boost its stock price.

Since the S&P 500 is a market-cap-weighted index, the inclusion of SpaceX -- which would likely have a multi-trillion dollar market cap -- would make it one of the index's top holdings alongside the Magnificent Seven stocks. A merger with Tesla, which was added to the S&P 500 in 2020, would make it an even bigger part of the index.

While SpaceX's inclusion in the S&P 500 won't ruin its balance and diversification, it will further shift the index away from slower-growth sectors toward higher-growth ones. It will also force conservative investors in the S&P 500 to buy into Musk's vision of the future.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.