S&P 500 and Nasdaq Investors: SpaceX's IPO Could Come With a Hidden Risk to Your ETFs
Key Points
SpaceX is set to go public this month as the largest IPO in market history.
Major market indexes are relaxing their rules around including new stocks, which could pose a risk for ETF investors.
If you're nervous about SpaceX volatility affecting your S&P 500 ETF, you have other options.
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From now until June 12, all eyes are on SpaceX as investors await the company's heavily anticipated initial public offering (IPO). With a valuation of nearly $2 trillion, it's likely to be the largest IPO in market history.
But SpaceX will leave its mark on many areas of the market, and you may end up owning shares whether you intend to or not. This situation is especially true for investors who own broad-market funds that track major indexes, such as the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC). Here's why investors should be paying attention.
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SpaceX could soon make its way to ETFs and index funds
SpaceX's target valuation of around $1.8 trillion could position it within the top 10 largest stocks in the U.S., and it could be included in the S&P 500 and Nasdaq-100 relatively soon after going public. Investors who own funds tracking those indexes could own a stake in SpaceX whether they want to or not.
Exactly when SpaceX might join these indexes is still unclear, but it will probably be soon. The Nasdaq's "Fast Entry" rule, which went into effect on May 1, could allow SpaceX to enter the Nasdaq-100 within 15 trading days. The S&P has proposed a similar plan, which could fast-track SpaceX's inclusion in the benchmark index.
Previously, new IPOs would have to wait at least a few months to join a major index. This approach not only allowed time for the stock prices to settle after the IPO, but it also ensured the companies were profitable before joining popular index funds and ETFs.
Furthermore, with OpenAI and Anthropic planning public offerings later this year, SpaceX's IPO -- and indexes' willingness to relax the rules -- could shape the future of the S&P 500 and Nasdaq.
Two alternative options for investors
Most ETFs and index funds are market-cap-weighted, meaning larger companies make up a larger share of the fund. At SpaceX's projected market cap, it could rank among the S&P 500's top 10 holdings. That isn't a bad thing on the surface, but because there are still so many unknowns surrounding SpaceX, it could introduce more volatility to the index.
An alternative option is to invest in an equal-weight ETF -- such as the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP). This type of ETF still holds all the companies in the S&P 500, but each stock accounts for roughly the same percentage of the portfolio.
When SpaceX joins the major indexes, it will still be included in an equal-weight ETF. However, it won't have as much influence on the fund's performance as it might with a market-cap-weighted ETF. The downside, of course, is that if SpaceX outperforms, it will be harder to capitalize on those returns with an equal-weight fund.
The other alternative is to build a portfolio of individual stocks. This approach requires more time and research than buying index funds or ETFs, but it's also the best way to tailor your portfolio to your needs and invest only in the stocks you want to own.
Regardless of your choice, it's wise to at least consider your options before SpaceX's IPO later this month.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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