Raising the stock price? Fifteen days after SpaceX goes public, index funds are expected to hold 30% of the floating shares!

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SpaceX is about to set the record for the largest IPO in history, but the controversy surrounding this listing goes beyond just its valuation—the mechanical buying of index funds is raising deep concerns in the market about price distortions.

According to a Bloomberg report on Wednesday, data from index rebalancing prediction firm Intropic shows that because Nasdaq, FTSE Russell, and MSCI all plan to quickly add SpaceX to their indexes, the proportion of SpaceX’s freely traded shares held by passive investors is expected to reach about 30% just 15 days after the IPO. In contrast, if the previous, slower inclusion rules were followed, this proportion would be only about 4%.

Academia and market observers warn that mechanical demand on this scale—compounded by the market’s feverish enthusiasm for Musk, SpaceX, and artificial intelligence—could create a self-reinforcing feedback loop, driving the stock price ever higher.

This dynamic means that SpaceX’s IPO will not only be the largest in history, but also serve as a major market stress test for the influence of passive investing.

The Three Major Indexes Compete to Add SpaceX Quickly, Passive Demand is Unprecedented in Scale

Nasdaq and FTSE Russell have both changed their rules to pave the way for SpaceX’s early inclusion, and MSCI also plans to follow suit. Data from Intropic shows that the actions of these three index providers will result in about 30% of SpaceX’s freely tradable shares being locked up in passive investment hands in a very short period after the IPO.

Marco Sammon, assistant professor at Harvard Business School who has long studied the market impact of passive investing, points out that the rush among major index providers to quickly include SpaceX is driven by inherent benchmark competition. “Every index provider is eager to bring SpaceX into their indexes; an important reason is the implicit competition between benchmarks,” he says. “This appears to be a case where index methodology, rather than fundamentals, could have a huge impact on pricing.”

Nasdaq economists Phil Mackintosh and Nicole Torskiy wrote a company blog post last week defending the fast inclusion mechanism, arguing that it helps indexes better represent publicly listed companies that really matter to the economy. They cited data from 2010 to 2025, showing that stocks that enter the Russell 1000 first often outperform those in the S&P 1500 index.

The "Shadow Tax" Effect: Arbitrage Window Shrinks, Passive Investors Forced to Buy at High Prices

In a normal index inclusion process, professional arbitrageurs like hedge funds and market makers usually build positions gradually ahead of time and then transfer those holdings to index funds when needed, smoothing out price shocks. However, the fast inclusion mechanism greatly shortens the arbitrageurs’ window for building positions.

Research by Marco Sammon and John Shim and Stefano Pegoraro of Notre Dame shows that when the inclusion window is compressed, mechanical demand of the same scale is more likely to create significant short-term price impacts, followed by a pullback. Sammon and his Harvard colleague Chris Murray also found in a study of index provider CRSP that companies fast-tracked for inclusion outperformed the market by about five percentage points before the inclusion date, but this excess return was given back within three weeks.

“When the window is compressed, mechanical demand of the same scale is more likely to create relatively larger short-term price shocks and subsequent pullbacks,” Sammon notes. “This effect is further amplified in the IPO context due to generally higher volatility and lower liquidity. In this scenario, index fund investors will pay a higher cost.”

This essentially amounts to a “shadow tax” on passive investors—they must buy at higher prices, while the issuing company cannot directly sell shares to index-tracking funds.

“Reflexivity Loop” Risk: Index Mechanisms May Disrupt Price Discovery

In a June 8 report, Intropic warned that the passive demand facing SpaceX could give rise to a “reflexivity loop”: the scale of passive flows into the indexes depends on SpaceX’s market cap on the benchmark date; but that market cap may be temporarily pushed up by the mechanical buying of arbitrageurs building positions ahead of inclusion, in turn increasing the scale of passive flows.

This loop could even extend to IPO pricing itself—if investors participating in the IPO are actually betting on subsequent passive buying, the IPO price will also be distorted.

“The price impact of passive flows is temporary, but it can disrupt price discovery at the most critical moment in a company's stock market journey,” wrote the London-based firm.

It is worth noting that S&P Dow Jones Indices has rejected proposals that would allow SpaceX, OpenAI, and Anthropic to be fast-tracked into the S&P 500 index. According to Bloomberg, passive investing tools currently account for about 60% of U.S. stock funds and control about one-fifth of the S&P 500’s market cap. Concerns over index investing distorting trades and prices have existed for a long time, and SpaceX’s listing is now putting this issue in the spotlight.

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