Passive investors, who previously avoided the volatility of bitcoin, are now set to gain mandatory exposure to SpaceX as it integrates into major index funds. With a $2.7 trillion market cap and implied volatility three times higher than the iShares bitcoin ETF, SpaceX’s inclusion is sparking concerns among financial advisors about increased portfolio risk and market distortion. Despite these worries, some experts believe index inclusion could eventually stabilize the stock’s extreme price swings.
For investors who intentionally avoided the unpredictable swings of bitcoin, a surprising new challenge looms: forced ownership of SpaceX, a company exhibiting three times the volatility of the popular cryptocurrency. This integration into major index funds is sparking debate among financial advisors and money managers.
SpaceX shares many characteristics with bitcoin: it currently generates no earnings or yield, boasts extreme volatility, and divides market sentiment sharply between ardent supporters and staunch critics. However, a crucial distinction exists: while bitcoin ownership remains a choice, many investors in broad index funds are about to become stakeholders in Elon Musk's ambitious space enterprise.
The company's imminent inclusion into some of the largest exchange-traded funds (ETFs) this summer, facilitated by rule changes from Nasdaq, CRSP, FTSE Russell, and MSCI, means passive investors will soon indirectly own a piece of SpaceX.
"Vanguard and other large money managers who are going along with Nasdaq's mandate and rule change are betraying U.S. savers," stated Ayman Saidi, partner at Strategic Investment Solutions, an Orland Park, Illinois-based RIA. He added, "VUG in my portfolios will likely own SpaceX soon. This is why I like Dimensional Funds: they do not simply copy an index. It will be a major market distortion." 'VUG' refers to the Vanguard Growth Index Fund ETF.
With a staggering $2.7 trillion market capitalization following a recent 4.5% rally, SpaceX is now the world's fifth-largest company. Its integration is expected to significantly amplify index-level volatility. Notably, SpaceX's implied volatility recently hovered around 120, a figure approximately three times higher than that of the iShares bitcoin ETF (IBIT). This positions SpaceX as potentially the most volatile stock in the S&P 500 and Nasdaq 100, and uniquely, the only trillion-dollar-plus company within these indexes that does not turn a profit.
Such a substantial addition is unlikely to go unnoticed, unlike the less impactful inclusion of MicroStrategy into the Nasdaq 100 in December 2024 when its market cap was under $100 billion.
"At this point, if you're allergic to volatility, you might just want to be in bonds," commented Kevin Kelly, co-founder of Delphi Digital. He highlighted the current speculative fervor around AI stocks, noting their resemblance to early token charts, and pointed out the polarizing nature of SpaceX, which even at a lower IPO valuation would have faced resistance from traditional sell-side analysts.
However, there's a glimmer of hope for volatility-averse investors. Implied volatility in SpaceX options tends to decrease in later-dated contracts, extending beyond the insider lockup period. Noel Smith, CIO and founder of Convex Asset Management, suggests that inclusion in the index itself could help stabilize the stock.
"Going in the index will reduce SpaceX vol – no way it stays at 120," Smith affirmed via text. "HFTs constantly rebalancing, passive flows that don't sell, there's way more liquidity."
This development signifies a significant shift for passive investment strategies, introducing a highly volatile, yet massive, growth company into portfolios that traditionally sought broader market exposure with less individual stock risk.
