Why the SpaceX IPO will affect your 401(k) like it or not

At the beginning of this year, the leaders of the world’s largest stock indexes found themselves in a bath.

SpaceX, Elon Musk’s rocket maker, told them it plans an initial public offering for the summer. The company said it wanted to be included in the top indexes — which are made up of various public companies and act as a barometer of the broader stock market — shortly after going public, two people familiar with the process said.

It was a big ask. Most indexes, such as the Nasdaq-100, don’t add companies until a year after they go public to protect index funds — widely used investment vehicles that track indexes — from trading volatility. If SpaceX were included faster than normal, it would prompt large index funds run by giants like Fidelity and Vanguard to buy millions of shares of SpaceX virtually overnight. While that could boost SpaceX’s stock price, it could put index fund investors at greater risk.

But missing out on what could be the biggest IPO in history in a year when other big offerings are also expected was too much for Wall Street, the two people said. Nasdaq, the exchange where SpaceX plans to list its stock, announced a rule change in May that will allow “quick entry” to the Nasdaq-100 by large private companies like SpaceX going public.

Others followed. FTSE Russell recently changed its methodology, which will see SpaceX included in its indices within a week of its publication.

The changes mean a slew of index funds — which millions of Americans own in their pension funds, retirement plans and personal portfolios — are poised to hold SpaceX stock soon after the company goes public. Antropic and OpenAI, artificial intelligence startups that plan to go public this year, would also quickly move into index funds, potentially exposing everyday investors to more financial risk, whether they like it or not.

“It’s historically unprecedented,” said John Polonis, a former Wall Street lawyer who worked for JP Morgan and now offers financial analysis on social media. “You can try to reallocate your retirement accounts to avoid investing in AI companies, but most people won’t do that. They’re kind of in the dust here.”

The index changes are just one way Mr. Musk, 54, has scrapped IPO norms. The tech tycoon is betting investors won’t resist a deal as tempting as SpaceX, the giant behind the Starlink satellite internet service, private rocket launches and, more recently, artificial intelligence research. The sheer size of his company — it is expected to be valued at $1.77 trillion at the IPO, bigger than Meta — has given Mr. Musk the power to demand tough terms from those looking to reap a windfall from his stock market debut.

Among them: Mr. Musk demanded that Wall Street banks, law firms, auditors and other advisers working on the IPO buy subscriptions to Grok, his AI chatbot that is part of SpaceX. And on Wednesday, he didn’t set a price range for the offer, as most companies that go public would do, giving only one stock price — $135 — for take-it-or-leave-it buyers.

Neither SpaceX nor Mr. Musk responded to requests for comment.

Nasdaq executives denied changing their rule for SpaceX. Nasdaq’s president, Nelson Griggs, told Bloomberg in a May interview that the exchange began discussing index rule changes more than a year ago. Because SpaceX, Anthropic and OpenAI are so big, he says, it’s important that index fund investors don’t have to wait to access them.

Emily Spurling, who heads Nasdaq Global Indices, said in a statement: “Our responsibility is straightforward: to ensure that the Nasdaq-100 continues to fulfill its stated goal of representing the 100 largest non-financial companies listed on Nasdaq.

One index provider refused to budge. On Thursday Standard & Poor’s he said would not change its criteria for inclusion in the S&P 500, one of the most watched indexes, meaning SpaceX would not be eligible for inclusion until at least mid-2027. Standard & Poor’s said it had decided that exemptions from its rules “should not be granted based on market capitalization alone.”

In the past, newly public companies could not immediately join most indexes because their stocks could be volatile and the companies generally had a limited history of reporting their finances.

With few exceptions, companies were required to have been publicly traded for one year, known as a “seasonal” period, before being considered for inclusion in the index. They also had to make available to the public enough shares, called a “float”, to justify their listing. In the case of the S&P 500, the company also had to report earnings in its most recent fiscal quarter and the previous full fiscal year.

These restrictions have come under pressure as the characteristics of companies going public have changed. Over the past decade or more, many tech startups have used investment from venture capital and private equity funds to stay private longer. When they filed for an IPO, they were usually bigger and more mature.

Because of this, the index officials theorized that these companies were likely to have excessive trading importance in the overall market. Those who manage which companies join the index said they had grown concerned that investors could miss out if large companies were not included sooner.

“In defense of these indexes, if the index wants a broader view of the market, including these companies earlier is one way to get there,” Polonis said.

SpaceX fulfills many of these qualities. Founded in 2002 by Mr. Musk, the company has raised billions of dollars from venture capital firms such as Founders Fund. It has become a major global enterprise, winning numerous government contracts and providing satellite Internet services in markets from Brazil to Australia.

Many index officials said they conducted market consultations and received feedback emphasizing the importance of “faster index representation” for large IPOs.

“The FTSE Russell indices exist to represent the market,” index spokeswoman Karen Lee said in a statement. “The speedy IPO process directly supports this mission.”

SpaceX has also been trying to find ways to increase demand for its shares after the IPO and has told indexes it wants to be included soon, people familiar with the process said.

According to some analysts, the index rule changes could turn “passive investing” — a set-it-and-forget-it way for amateur investors to accumulate wealth — into something riskier. Index funds are a popular form of passive investing because the funds simply track the market.

“The whole point of passive investing is that you can close your eyes and expect the market to do the work for you,” said Ed Elson, host of the “Prof G Markets” podcast. “If you believe Elon Musk, be my guest and invest directly in the IPO, but you can’t just stuff these really terrible companies into people’s 401(k)s and retirement accounts.”

With SpaceX’s IPO looming next week, some retail investors said they felt trapped into owning the stock even though they didn’t want to.

Ian Yarbrough, 46, who works in utilities at Indiana University in Bloomington, has a pension fund and has also invested in index funds. He has long been wary of Mr. Musk’s business, shunning what he sees as the hype surrounding AI. So when he heard that SpaceX could quickly be included in the index funds he owns, he tried to make changes.

But after finding that his brokerage firm was making it difficult to avoid funds invested in AI companies like SpaceX, he gave up.

“I don’t think anyone is paying attention to the retail investor or the average person anymore,” he said. “It seems the system is rigged against us.