One of the more interesting aspects of the upcoming SpaceX IPO is how it will be fast-tracked for inclusion in indexes like the S&P 500 and Nasdaq 100. Recent changes from Nasdaq will allow it to be added to its benchmark index just 15 trading days after it goes public, while it will be eligible for the S&P 500 around six months after its IPO.
There are few better in the investing world to chat with about indexing than Rob Arnott, the founder of Research Affiliates, who has made indexing strategies his career focus. Recently, his research has focused on how new index additions tend to underperform the market after inclusion, while the stocks that are kicked out tend to outperform.
So, on Wednesday, I asked Arnott: Would SpaceX be subject to this underperformance?
His answer, in short? Absolutely not. In fact, as a result of the indexing changes, Arnott thinks the stock will soar.
His reasoning comes down to the stock’s small float, or available portion of shares trading on the market. SpaceX will aim to raise $75 billion in its IPO, valuing the company at around $2 trillion. That would result in around 3.75% of its market cap being traded on public markets.
Before May 1, firms had to have at least a 10% float to be included in the Nasdaq 100. Now, there’s no minimum as long as a company is in the top 40 largest stocks trading on the exchange.
Arnott argues that the combination of such a small float and the guaranteed demand from index funds will squeeze SpaceX’s share price upward. And going forward, as more of SpaceX’s float is released onto the market, its weighting in the index will increase, mandating index-tracking products to buy accordingly.
Of course, ongoing gains are not a sure thing, as stock prices are subject to macroeconomic factors, earnings performance, and investor sentiment. But to Arnott, the math signals upside is on the way.
“I would say that the buying pressure will be overwhelming,” he said.
