No matter how you look at SpaceX's valuation, fund managers may "have to buy in."

No matter how you look at SpaceX's valuation, fund managers may "have to buy in."

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SpaceX is set to complete its IPO this Friday. According to an analysis published by Alphaville, a column under the UK’s Financial Times, on June 10, just US mutual funds and ETFs alone will need to buy over $14 billion worth of SpaceX shares between the IPO’s completion and July 3—not because these fund managers believe SpaceX is worth the price, but because they simply have no freedom to “abstain.”

Not buying SpaceX means shorting SpaceX

For fund managers whose performance is measured against market indices, they are essentially doing one thing: overweighting stocks they are bullish on, and underweighting (or not holding) stocks they are not bullish on. But “underweighting” is mathematically equivalent to “shorting”—if a stock rises, they have to explain to clients why they underperformed the benchmark.

Once SpaceX enters an index, it will automatically get a certain index weighting. If fund managers do not buy, their portfolio weighting will be lower than the index weighting, which, under the framework of relative returns, is no different from shorting.

As Alphaville puts it: “For these types of fund managers, not buying SpaceX functions exactly the same as shorting SpaceX.”

Index providers collectively “greenlighting”: the real driver behind this buying wave

The reason for the scale of this passive buying is, fundamentally, that major index providers have recently made intensive updates to their fast-track inclusion rules.

  • CRSP and Nasdaq: Changed the rules for fast-track inclusion of mega-cap IPOs—either speeding up inclusion or relaxing the free-float share ratio requirement
  • FTSE Russell: Adjusted fast-track rules to align with its FTSE GEIS series
  • S&P DJI: Although currently keeping SpaceX out of the S&P 500, it shortened the time window for inclusion in its “Total Market Index” series

Each index has a different inclusion timetable: CRSP, Russell, and S&P DJI indices will include after 5 trading days post-IPO; MSCI includes after 10 trading days; Nasdaq waits 15 trading days, and if the free float is less than one-third, it is counted with triple weighting.

$14 billion, to flow in three waves

Researchers at Morningstar carefully examined prospectuses of 6,006 US registered mutual funds and 5,100 ETFs, identifying 3,203 different benchmarks covering $41.1 trillion in AUM, and sent the data to Alphaville.

Alphaville’s calculations show that $14 billion worth of SpaceX stock purchases will concentrate at three time points:

  • June 19: about $8.5 billion
  • June 26: about $1 billion
  • July 3: about $4.7 billion

Total for the three waves: $14.2 billion.

This number has two important references:

First, if the S&P 500 index committee had chosen to include SpaceX in the S&P 500, the figure would be around $11 billion higher.

Second, if the index committees had maintained the original fast-track inclusion rules without any changes, this number would be only about $1 billion—that is, the collective rule adjustments by index providers directly “created” about $13.2 billion in compulsory buying demand.

Moreover, this $14.2 billion only counts the US mutual funds and ETFs. Pension funds, insurance companies, endowments, and all overseas institutional investors are not included.

Valuation disputes unresolved

SpaceX’s current valuation is about $1.75 trillion, approximately 92 times last year’s revenue.

There are clear divisions in the market over the valuation of this Musk-owned company. Alphaville directly refers to it as a “lossmaking value telecom firm” in the article—a characterization that is itself quite controversial and reflects the lack of consensus on how to price SpaceX.

But for index-tracking fund managers, this issue may not matter. They are not faced with the question of “is SpaceX worth the price,” but rather “what is the cost of not buying.”

Alphaville’s conclusion: “We’re not sure if Musk can send humans to Mars. But this round of intensive index rule changes means he’ll have an almost immediate pull on all kinds of investment portfolios.”

Risk Warning and DisclaimerMarkets have risks, investment needs to be done cautiously. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article meet their specific circumstances. Investing based on this is at your own risk. ```