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SpaceX is shaping up to be a defining variable in US equity market flows as it prepares for what would be the largest initial public offering in history. With inclusion in major indexes — FTSE Russell, MSCI and the Nasdaq 100 — expected shortly after listing, exchange-traded funds and index funds are set to pour passive capital into the stock on a large scale.

Market analysts estimate that up to $17 billion could flow into SpaceX within roughly three weeks of its listing. The process may also generate some selling pressure on existing US mega-cap growth stocks such as Nvidia, Microsoft and Apple, analysts said.

SpaceX lists on the Nasdaq on Friday at a public offering price of $135 per share, giving the company a valuation of approximately $1.75 trillion. On a single-IPO basis, that surpasses Saudi Aramco to become the largest in history.

The arrival of the biggest IPO on record means passive funds tracking the relevant indexes have no choice but to buy the stock mechanically. Passive funds refer to ETFs and index funds that replicate the composition of a given index.

An ETF tracking the Nasdaq 100, for example, must hold each constituent in proportion to its weight in the index. Once SpaceX is added to the Nasdaq 100, those ETFs will be required to purchase SpaceX shares in line with its assigned weighting.

SpaceX is scheduled for inclusion in FTSE Russell, MSCI and the Nasdaq 100 shortly after listing. KB Securities estimated that passive inflows tied to FTSE Russell and MSCI alone could reach up to $10 billion. Adding the effect of the Nasdaq 100 inclusion scheduled for July 6, total passive buying demand over roughly three weeks following the listing could reach up to approximately $17 billion.

"Across the four major indexes, passive inflows from mechanically rebalancing vehicles — ETFs, index funds and full-replication passive strategies — around the actual inclusion dates are estimated at roughly $7 billion to $10 billion combined for FTSE Russell and MSCI, and approximately $6.2 billion to $7.1 billion for the initial Nasdaq 100 inclusion demand," said Park Yu-an, a researcher at KB Securities.

Particularly notable is the structure of this supply-demand event: new categories of buyers keep entering the picture over time. Starting Monday, single-stock leveraged ETFs based on SpaceX as the underlying asset will begin trading. Index inclusions are then scheduled in sequence — FTSE Russell on June 19, MSCI on June 26 and the Nasdaq 100 on July 6.

In effect, different pools of passive capital will flow in on a staggered basis over roughly three weeks. If market participants begin buying ahead of schedule in anticipation of these events, short-term share price volatility could increase, analysts said.

There is also the possibility of capital reallocation within US growth stocks. When passive funds add a new constituent, they must trim existing holdings to make room. Because the total investment pool is fixed, funding a SpaceX position requires reducing the weight of current holdings.

Put simply, the more weight SpaceX gains in the indexes, the more the existing mega-caps — Nvidia, Microsoft, Apple, Amazon and Meta — are diluted.

KB Securities estimated that if SpaceX enters the Nasdaq 100 at a weighting of approximately 0.44 percent, Nvidia's weight would fall from 9.0 percent to 8.96 percent, generating initial passive selling demand of roughly $500 million to $600 million. Microsoft, Apple, Amazon and Meta would face similar dilution effects.

The bigger variable, however, lies beyond year-end. SpaceX's expected initial Nasdaq 100 weighting of 0.44 to 0.50 percent could rise to 1.5 to 2.0 percent if the actual free-float ratio expands to 15 to 20 percent following lock-up expirations and additional share supply after the IPO. In that scenario, Nasdaq 100 passive buying demand could grow from the current estimate of $6.2 billion to $7.1 billion to as much as $24.7 billion to $28.2 billion.

Over the longer term, the biggest question is whether SpaceX will be added to the S&P 500. For now, SpaceX has been excluded from S&P 500 eligibility after S&P Dow Jones declined to adopt a relaxed early-inclusion rule for mega IPOs. As a result, the world's largest passive funds — those tracking SPY, VOO and IVV — will sit out this particular supply-demand event.

If SpaceX eventually meets the profitability and free-float requirements for S&P 500 inclusion, the picture could change entirely. KB Securities said that under a conditional long-term scenario, additional passive buying demand could reach $65 billion to $100 billion. If the current listing represents a "first-wave black hole event," the truly large supply-demand event may not arrive until 2027 or later.

Market analysts are drawing comparisons to Alibaba's inclusion in the MSCI Emerging Markets index in 2015. At the time, the addition of Alibaba and other Chinese American depositary receipts raised China's weight in the MSCI EM index from 20.5 percent to 25.2 percent, while reducing the share of existing major emerging markets such as South Korea, Taiwan and Brazil. In practice, capital did shift toward Chinese internet companies within the emerging market universe.

Analysts said SpaceX's listing is unlikely to trigger a sharp selloff in existing mega-caps. "Alibaba's inclusion did create a dilution effect on existing EM weights, but it did not lead to a shock that collapsed the broader market," Park said.

"This SpaceX IPO can be interpreted in a similar vein," he added. "Rather than the sharp decline in existing big-tech stocks that the market fears, this event is more likely to mark the beginning of a gradual diversification of US growth stock flows — which have been concentrated in the Magnificent Seven over the past two years — toward a major new growth name."


th5@heraldcorp.com