In my more than two decades covering index funds, I have never seen anything quite like the frenzy surrounding the SpaceX IPO. The sheer scale and market anticipation of this pending debut this week have done something rare. It has encouraged index providers to re-evaluate how they build and maintain benchmarks that are tracked by trillions of dollars. Some indexes from FTSE Russell, Nasdaq, and TMX VettaFi are expected to soon include SpaceX, while others from S&P Dow Jones will not.
To truly understand the mechanics behind these shifts, I spoke with Brian Coco, Chief Product Officer at TMX VettaFi. We broke down how indexing is evolving to meet this out-of-this-world trend.
Key Takeaways
- SpaceX anticipation triggered rare structural changes to major index methodologies.
- Free-float restrictions will initially limit the mega-cap’s benchmark weighting.
- Index providers adapt core rules following intensive market stakeholder consultations.
An Interview with Brian Coco, Chief Product Officer at TMX VettaFi
Todd Rosenbluth: Brian, nobody takes altering the core rules of an index lightly. How do index providers approach the decision to consider changes to methodologies?
Brian Coco: Index providers consult extensively with market stakeholders when contemplating rule changes. The ultimate decision to change or not change an index almost always reflects the collective views of those stakeholders. It is a highly collaborative, deliberate process designed to ensure the benchmark continues to accurately represent the market.
Rosenbluth: SpaceX is targeting a massive IPO of $75 billion and an overall valuation of more than $1 trillion. Given that size, how will it be integrated into some traditional market-cap-weighted benchmarks? What limitations might it face out of the gate?
Brian Coco: Most market-cap-weighted benchmarks take into consideration what percentage of a company’s shares are actually available for public trading. This is the free float. At the $75 billion target SpaceX has set for its IPO, the company would technically qualify for most large-cap indices right away. However, due to limited initial float, it would likely enter at a weight of roughly 10 to 15 basis points. Over time, as employee lock-up periods expire and more shares hit the market, the free float should rise to allow for a larger index weight. Though it remains doubtful it will reach full unadjusted market-cap weight anytime soon.
Investors Fear Missing Out on SpaceX
Rosenbluth: We have seen high market concentration in major indices lately, where a handful of tech giants drive the lion’s share of market performance. Does that dynamic impact index providers’ efforts to get a mega-cap name like this into the fold quickly?
Brian Coco: For many investors, the realization that such a large part of the returns of major indices over the past few decades has come from a small cohort of companies reinforces a powerful narrative. Ultimately, the fear of missing out on the next generational compounding asset significantly outweighs the fear of an over-valuation of pending mega-cap IPOs. Indexing must reflect where the market’s return drivers are shifting.
VettaFi's Methodologies
Rosenbluth: Can you shed any light on how VettaFi is specifically handling this event within its own suite of benchmarks? Is our team adapting the methodologies for the upcoming rebalance?
Brian Coco: Yes. We have made specific adjustments to the methodology of our core and certain thematic benchmarks after thorough consultation with our stakeholders. Assuming the IPO successfully goes off this Friday, SpaceX is expected to enter the appropriate VettaFi benchmarks at our upcoming late June rebalance.
In the VettaFi Space Index, the guidelines were amended to shorten the Fast Track IPO seasoning period allowing for an expedited inclusion of SpaceX. It will likely enter the index shortly after its debut at a weight of less than 5% but could reach as much as 15% once share lockups expire. This index is behind the $1 billion thematic ETF, the Procure Space ETF (UFO ).
Rosenbluth: Thanks Brian.
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VettaFi LLC (“VettaFi”) is the index provider for UFO, for which it receives an index licensing fee. However, UFO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of UFO.
