Index Investors: Here's How Much SpaceX Stock You're About to Own

Index investing is typically seen as a simple way to match the returns of the overall market. And most indexes are cap-weighted, meaning higher-value companies make up a larger percentage of the index than lower-value companies. For example, Nvidia (NASDAQ: NVDA) with its $5 trillion market cap, is the biggest component of the S&P 500, Nasdaq-100, and CRSP U.S. Total Market indexes.

Space Exploration Technologies (NASDAQ: SPCX), better known as SpaceX, made its market debut at a valuation of $1.77 trillion. The strong stock performance pushed it to become the fifth-largest company by market cap after its third day of trading. And with recent changes to index inclusion rules, many index investors could find they own a slice of the high-flying IPO stock very soon, and the index funds' weightings could surprise many.

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The fast-track to index inclusion for SpaceX

All major index providers made changes to their inclusion rules ahead of the SpaceX IPO. The following three are likely the most relevant for investors.

S&P Global, the company behind the S&P 500, changed the float requirements for inclusion in its Total Stock Market index. That will make it easier for SpaceX, which issued only about 4% of its shares in its IPO, to qualify for inclusion. However, it made no changes to the S&P 500 eligibility criteria. That includes the 12-month waiting period for IPO inclusion and profitability requirements. As such, S&P 500 index funds won't gain any exposure to SpaceX stock this year.

Nasdaq updated the requirement for the popular Nasdaq-100 index. First, it made eligibility for the index based on the combined market cap of listed and unlisted shares and removed the 10% float requirement, addressing the challenge posed by SpaceX listing a tiny percentage of its shares. Second, it enabled inclusion after just 15 trading days. As a result, investors in Nasdaq-100 index funds like the Invesco QQQ Trust (NASDAQ: QQQ) will gain exposure to SpaceX in a few weeks.

CRSP made a small tweak to its eligibility requirements. It will add recent IPOs to its indexes if they have 10% or more of shares outstanding or 0.5 basis points of the float-adjusted market cap of the entire index-eligible universe. In other words, SpaceX will qualify for inclusion in most relevant CRSP indexes even with its relatively small float. That includes the U.S. Total Market index, which is the index tracked by the popular Vanguard Total Market ETF (NYSEMKT: VTI). The stock will be included in the index after just five trading days.

Here's how much SpaceX your index fund will own

While SpaceX is one of the highest-valued companies in the world after its market debut, there's a key factor that will limit its weighting in most index funds: float.

As mentioned, SpaceX issued only about 4% of its shares to the public in its IPO. The indexes weight companies based on how much of the stock is actually available to investors. So, despite SpaceX being worth over $2.6 trillion as of this writing, only about $125 billion is available. By comparison, about 97% of Nvidia shares are publicly available, about $4.9 trillion as of this writing.

The Nasdaq-100 index will include up to three times a large IPO's float-adjusted weight based on its new rules. Even so, that means SpaceX will account for less than one-tenth of the amount of Nvidia in the index. If prices hold steady from today, investors with $10,000 in the Invesco QQQ ETF will hold about $64 worth of SpaceX stock when it becomes eligible after 15 trading days.

The exposure in the Vanguard Total Market ETF will be even less. There's no weight adjustment for low float stocks. And considering the much broader universe, it's already a smaller component of the index. Overall, $10,000 invested in the Vanguard ETF will end up with about $17 worth of SpaceX stock when it gets added to the index.

The weightings for SpaceX in each index will increase as lockups expire. SpaceX is using a staggered lockup to avoid flooding the market with shares, so the rise will be gradual over the next year or so.

However, SpaceX is likely to see much lower-than-average float as long as Elon Musk remains in control. He holds about 40% of shares, and his lockup doesn't expire for one year. Even then, he's unlikely to sell any of the supervoting shares that give him control of the business. A typical IPO sees its free float rise to 50% to 60% of its stock once the lockup period expires, but SpaceX's is likely to be lower. As such, it'll remain underweighted relative to its actual value in most index funds.

Adam Levy has positions in S&P Global. The Motley Fool has positions in and recommends Nvidia and S&P Global. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.