SpaceX Will Not Get Fast-Tracked Entry Into the S&P 500. Here's What That Means for Investors.

This is shaping up to be a historic year for the stock market. SpaceX, already one of the world’s most valuable start-ups, is expected to have its initial public offering on June 12. The company is hoping to raise $75 billion at a valuation of $1.8 trillion, making it the largest IPO of all time.

And some other big companies, such as OpenAI and Anthropic, are expected to have mammoth IPOs of their own this year.

The offerings come as three of the market’s major indexes proposed new fast-track processes to add new large IPOs more quickly. And while the Nasdaq and Russell indexes have approved those changes, S&P Dow Jones Indices, which operates the S&P 500 and related indexes, announced on June 4 that it would not implement them.

Image source: Getty Images.

“No changes will be made to the eligibility criteria, including financial viability screens, seasoning period, or minimum IWF (investible weight factor), for the S&P 500, S&P MidCap 400, or S&P SmallCap 600 as a result of the S&P Dow Jones Indices consultation on the treatment of mega-cap companies. Accordingly, there will be no changes to existing methodology for this index family,” the company said in a statement.

Let’s delve into what that means for the SpaceX IPO specifically and for investors looking to buy the stock when it goes public.

SpaceX won’t get a quick boost from S&P 500 index funds

The S&P 500 is an index composed of the 500 largest companies in the U.S. and is generally considered one of the best barometers of the health of the stock market.

Currently, there are only six U.S.-based companies that have a market cap greater than the $1.8 trillion that SpaceX is seeking -- Nvidia, Apple, Alphabet, Microsoft, Amazon, and Broadcom. So, SpaceX will eventually have a prominent place in the index -- but not right away.

The rule considered — and rejected — by S&P Dow Jones Indices was to cut the 12-month waiting period in half and waive a requirement that the company have positive earnings.

Now, the earliest SpaceX can be listed in the S&P 500 is mid-2027, and only if it has four quarters of positive earnings under generally accepted accounting principles (GAAP). It must also have a market cap of at least $22.7 billion -- a hurdle that the company will easily clear.

When a company is listed on the index, there is a flurry of buying from companies that offer exchange-traded funds tracking the index. Some of the biggest and most well-known are market-cap-weighted funds, meaning they would need to buy enough SpaceX stock to make it the seventh-largest weighting in their ETFs (assuming a SpaceX market cap of $1.8 trillion).

An example is the Vanguard S&P 500 ETF (NYSEMKT:VOO). Broadcom has a market cap of about $1.8 trillion right now and accounts for 3.2% of VOO, which, in itself, has total assets of $1.7 trillion. So, to achieve that weighting, VOO holds $51.3 billion in Broadcom stock, or about 12.8 million shares.

When you then consider all the other market-weight ETFs that will be making the same purchases -- the SPDR S&P 500 ETF Trust and the iShares Core S&P 500 ETF are just two examples -- it’s easy to see how index funds will gobble up an incredible amount of SpaceX stock.

That’s why companies that get listed in an index can see a pop in stock price. But that won’t happen for SpaceX in the S&P 500 for at least a year.

But there will be other avenues for investors

While S&P Dow Jones Indices isn’t changing the rules, Nasdaq and Russell have -- which means funds that track their families of indexes will have SpaceX much sooner than the S&P 500. The Nasdaq-100, which includes the 100 largest non-financial companies in the U.S., will be able to add SpaceX on its 15th trading day. And the Russell 1000, which follows the 1,000 biggest U.S.-based companies, can include it on the company’s fifth trading day.

So, popular funds such as the Invesco QQQ Trust (NASDAQ:QQQ), with nearly $500 billion in assets under management, will be required to add SpaceX relatively quickly. So will the iShares Russell 100 Growth ETF (NYSEMKT:IWB), which has $131 billion in assets.

And investors will still be able to buy shares of SpaceX directly or through an ETF that specifically includes artificial intelligence, space, technology, or other avenues.

While the benefits of an S&P 500 inclusion will be delayed for at least a year, there will still be plenty of momentum behind SpaceX stock when it goes public.

Patrick Sanders has positions in Invesco QQQ Trust and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Broadcom, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.