The SpaceX initial public offering (IPO) has some investors looking for a “liftoff” in their funds – even as others brace for potential volatility.
SpaceX was the largest-ever IPO in US history. Its total valuation was an estimated $1.77 trillion, making it one of the ten biggest companies in the world. That creates lots of media hype!
Why this matters to your portfolio:
Indexes, and the products that seek to track them, must maintain an accurate reflection of the investable market, even as the market changes. Indexes tracking large US companies will have to include SpaceX and other mega IPOs as part of those rules. In addition, new inclusion rules, adopted by most index providers, will allow swifter inclusion of mega IPOs into those indexes.
However, rather than adding a bunch of SpaceX after 5-15 days, a companies’ weight in the index (and thus the index products which you own), is based on the value of the company’s shares that are available for public investors (called “float adjusted capitalization”). This is not the headline valuation, which includes shares privately held by insiders and other select investors. As a result, the stock of SpaceX and other “hot” IPOs, will make up only a small portion of the index funds initially, and only receive a greater portion over time (for SpaceX, index weights are anticipated, at first, to be 1% or less). While “fast-track” inclusion keeps indexes representative, float adjustments can help limit outsized allocations and mitigate the impact of large IPO inclusions.
The bottom line:
We continue to monitor this closely. An index should be representative of, and evolve with, the IPO market. Still, for most index-based portfolios, the impact of any of these mega IPOs may initially be modest.
As always, if you have questions about how any of this applies to your specific situation, we’re here to talk.