SpaceX’s Nasdaq-100 entry puts Musk’s company inside index funds

SpaceX’s arrival in the Nasdaq-100 has pushed Elon Musk’s rocket company into funds held by many investors who did not choose the stock directly. The move matters because index funds tracking that benchmark must own shares in the companies it includes, tying passive portfolios to a newly public company with unusual governance.

Nasdaq changed its rules before SpaceX’s public listing so a large enough newly public company could enter the Nasdaq-100 on its 15th trading day, Reuters reported. SpaceX requested that change, Reuters reported.

SpaceX joined the Nasdaq-100 on July 7, according to The Verge. That required funds designed to mirror the index to buy the stock, even though investors in those funds may have had no particular view on SpaceX or Musk.

Why index funds now own SpaceX

Index funds aim to match a market benchmark such as the Nasdaq-100 or S&P 500 rather than select individual winners. Burton Malkiel, whose 1973 book “A Random Walk Down Wall Street” helped popularize index investing, told The Verge that most investors struggle to beat the market over long periods because “a very small minority of stocks are responsible for the whole return.”

Malkiel said he would be cautious about buying SpaceX as a standalone stock, calling it “tremendously overhyped” in an interview with The Verge. He also said SpaceX’s inclusion is not a reason to abandon index funds.

Passive investing has become a dominant force in markets. In 2024, assets in passive strategies such as index funds surpassed assets in active funds, according to Elise Ryan of State Street Investment Management, as cited by The Verge.

The size question

SpaceX’s public offering was valued at $1.77 trillion, NBC News reported. The company’s market capitalization was more than $1.5 trillion, according to The Verge, but less than 5 percent of its shares were sold in the IPO.

That float matters for index exposure. The Wall Street Journal reported that Nasdaq’s methodology means SpaceX is treated as a smaller company inside the index than its headline valuation might suggest, because only a limited share of the company is publicly available.

That could change as lockup restrictions expire. Bloomberg’s Matt Levine noted that people subject to 180-day lockups may be able to sell more shares after SpaceX releases second-quarter financial results than were sold in the IPO, according to The Verge. Those results were expected in mid-August.

The Wall Street Journal reported that index funds may help absorb some selling from insiders whose lockups expire. At the same time, Bloomberg reported that short sellers were also positioning around those releases, a sign that trading around SpaceX may remain volatile.

Governance worries

Some public officials and retirement fund leaders have objected to SpaceX’s corporate structure. The CEO of CalPERS and the New York state and city comptrollers sent SpaceX a letter criticizing what they called its “novel and extreme governance structure,” according to The Verge.

Musk holds a majority of SpaceX voting rights, The Verge reported. The company has also limited shareholder litigation rights, reducing tools that investors usually have when they object to corporate decisions.

That creates a problem for investors who want to avoid SpaceX but use Nasdaq-100 funds. Selling the individual stock is not an option inside a broad index fund, and the largest index managers often handle governance votes on behalf of fund investors.

What investors can do

SpaceX has not been fast-tracked into the S&P 500, Bloomberg reported. Investors who prefer to avoid the company may choose S&P 500 funds instead of Nasdaq-100 funds, though that also changes the type of market exposure they hold.

The Verge also noted that some environmental, social and governance funds may exclude SpaceX because of Musk’s control. Those funds can carry higher fees and different holdings, and Malkiel told The Verge that an investor trying to avoid Musk through an ESG fund could still find Tesla included because of its electric vehicles.

Malkiel’s broader point was that index investing is built for uncertainty. He told The Verge that only about 4 percent of stocks deliver the market’s long-term return, while the rest lag, making broad ownership the central reason investors use index funds in the first place.

This story draws on original reporting from The Verge.