It'll Be Awhile Before SpaceX Joins S&P 500 ETFs

Friday, June 12, is shaping up to be a memorable day in financial market history, as SpaceX stock will finally become available to the broader investing public.

Elon Musk's company is poised to shatter initial public offering (IPO) records, with reports indicating SpaceX will sell 555.6 million shares publicly to raise $75 billion at a valuation of $1.77 trillion. Yet for all the noteworthy footnotes attached to this IPO, SpaceX is going to miss out on a big one: faster-than-usual inclusion in the S&P 500 (SNPINDEX: ^GSPC).

SpaceX won't be gaining fast entry into S&P 500 ETFs. Image source: Getty Images.

Though not specific to SpaceX, S&P Dow Jones Indices stunned some indexing nerds and market observers on June 4 when it announced it wouldn't alter the eligibility criteria for the S&P 500, S&P MidCap 400, and S&P SmallCap 600.

Why S&P's decision matters

Due to SpaceX hype, there's plenty of enthusiasm for space stocks these days, but some investors would rather nibble at this asset class rather than feast on it through individual stocks or space-industry-focused exchange-traded funds (ETFs).

So it's not a stretch to say some retail investors may have been hoping ETFs such as the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the iShares Core S&P 500 ETF (NYSEMKT: IVV) would include SpaceX shares six months after the IPO rather than the usual minimum 12-month waiting period, but that's not happening. Translation: The earliest possible entry date for SpaceX joining funds such as the mega-sized Vanguard S&P 500 ETF is sometime in June 2027.

Simple math confirms the importance of the decision to make SpaceX "wait it out." By one estimate, there's $16 trillion in assets in S&P 500-focused ETFs and index funds, but none of that capital will be directed to SpaceX shares anytime soon.

Fans of indexing and market lore may be thinking this is another case of S&P "having it out" for Musk. Tesla was public for 10.5 years before it joined the S&P 500 in December 2020. Less than two years later, the stock was booted from the environmental, social, and governance (ESG) offshoot of that index, meaning Tesla was persona non grata in ESG ETFs tracking the S&P 500 ESG Index.

Forget the conspiracy theories because S&P didn't directly mention SpaceX in its June 4 statement. Rather, it used the term "megacap," implying that the decision not to alter the S&P 500's inclusion guidelines will also apply to the likes of Anthropic and OpenAI when those companies commence their IPOs.

Investors have alternatives

For investors seeking a small slice of SpaceX through broad-market ETFs, there are alternatives to S&P 500-tracking funds. One idea is the $7.7 billion Vanguard Russell 1000 ETF (NASDAQ: VONE), which merits consideration because index provider FTSE Russell is allowing SpaceX to enter its indexes after just five trading days.

Another alternative is the $98 billion Invesco NASDAQ 100 ETF (NASDAQ: QQQM) because SpaceX is poised to enter the Nasdaq-100 after just 15 trading days.

Investors currently holding profitable positions in a fund such as the Vanguard S&P 500 ETF should talk to an advisor or a tax professional about the tax implications of selling that holding to buy another broad market fund that will more rapidly include SpaceX.

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