3 Large ETFs Likely to Hold SpaceX

Elon Musk’s trillion-dollar space firm, SpaceX, is likely to go public in the coming months. Depending on whom you ask, the private company could fetch a valuation of between $1.5 trillion and $2 trillion for the expected $75 billion to be raised in the IPO process.

This presents some challenges for indexes and index-tracking ETFs. Index providers are currently considering how to allow mega IPOs like SpaceX into their portfolios while still maintaining traits of the very best indexes. With few available shares on day one relative to SpaceX’s total market cap, indexes are getting creative for how to maintain exposure while keeping their portfolios easily tradable.

Here are three large index ETFs that are likely to hold SpaceX after it goes public.

3 Large ETFs Likely to Hold SpaceX

1. Invesco QQQ Trust QQQ
2. iShares Russell 1000 ETF IWB
3. Vanguard S&P 500 ETF VOO

First up is Invesco QQQ, which tracks the technology-oriented Nasdaq 100 Index. Nasdaq was the first index provider to consider a rule change that would grant large Nasdaq-listed IPOs early admission to its flagship index. And QQQ will buy the stock once it’s added to the index.

The May 1 rule change allows entry for IPOs whose market cap would rank among the index’s 40 largest holdings.

Another tweak to the index which impacts how many shares QQQ will buy of SpaceX is Nasdaq’s consideration of company float. Prior to the change, Nasdaq required companies to have a minimum float ratio of 10%, meaning eligible companies must have had at least 10% of shares available to trade on secondary markets. Going forward, companies will not need to meet this strict requirement. But if they don’t, they will have their weight in the index scaled down. This makes sure that funds tracking the index can hold and trade a representative amount of SpaceX shares without issue.

While Invesco QQQ is not our favorite index ETF, these tweaks should allow it to remain representative of its target market and trade tick for tick with its benchmark Nasdaq 100 index.

Next up is iShares Russell 1000 ETF, ticker IWB. This broad ETF holds the largest 1,000 stocks in the US market and charges 15 basis points annually.

FTSE Russell has historically been one of the more lenient index providers when it comes to float. In large- and mega-cap stocks, this is not an issue, but it becomes more apparent in less liquid market segments like small caps. This makes SpaceX an interesting case.

It’s fairly rare for a mega-cap stock to have so few of its shares available to trade. The $75 billion SpaceX is expected to raise would put its float between 3% and 5% of its total market cap, potentially making it ineligible for the Russell 1000, given that index’s 5% minimum float requirement. However, FTSE Russell is considering relaxing that float requirement for “sizable IPOs.”

The last ETF I’ll note is the least likely of these three to own SpaceX stock in the near future. Vanguard S&P 500 ETF, ticker VOO, closely follows the S&P 500 index and is poised to own SpaceX as soon as the index grants its entry. VOO is one of our favorite ETFs and charges investors just 3 basis points annually.

Historical rules suggest new IPOs shouldn’t be allowed into VOO’s portfolio, but S&P is reportedly considering fast entry to its flagship index that could allow certain companies to bypass these rules. Details are scant, but surely float is being considered too, given the trillions of dollars tied to the S&P 500 index.

Any rule change would be a watershed moment for this famous index, since an unnamed committee decides which companies are eligible, and rule changes are almost unheard of.

Regardless of when the committee grants SpaceX admission, VOO’s complexion will quickly shift to reflect the addition. Further, the myriad active managers who maintain some mandate to that index may also have to adjust their portfolios to reflect the change within their benchmark.

Right now, and before any mega IPOs hit the market, these discussions amount to little more than just noise for investors. Work is being done in the background to make sure prominent indexes and the funds that track them are prepared for what’s coming, but investors should only monitor closely once rule changes are final and impacts are communicated. So, for now, stay the course. And watch this space.