Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Index Funds Are Absorbing SpaceX Before the IPO
Transcript
- Lucas: So the SpaceX IPO hasn't happened yet — it's expected to price any day now — but the S&P 500 already made a big call on the stock. And most index fund investors don't even realise it. Luna: Wait, how can the S&P 500 price a stock that isn't even public? You mean through private market allocations? Lucas: Not exactly. What I'm talking about is the indirect exposure that passive funds already have to SpaceX through existing holdings. The biggest one being Tesla. Elon Musk's compensation at Tesla is tied in part to SpaceX milestones, and Tesla's own valuation has a 'Musk premium' baked in — analysts estimate it's worth something like 10 to 15 percent of Tesla's current market cap. Luna: So every time an S&P 500 index fund buys Tesla — which it does, automatically — it's basically getting a slice of SpaceX. Lucas: Exactly. And it's not just Tesla. There are also venture funds and private equity vehicles that have SpaceX on their books, some of which are held by other index constituents. The S&P 500 committee doesn't formally factor that in, but the market does. So when the IPO actually lands, those existing index holdings have already been pricing in the SpaceX narrative for quarters. Luna: That's a fascinating grey area. On one hand, it means passive investors get early exposure. On the other, does it inflate the prices of those existing stocks beyond fundamentals? Lucas: That's the debate. Let's look at the numbers. As of this morning, the S&P 500 sits at 7431, up about 0.3 percent in five days. The Dow is at 51202, up 0.8 percent. But the NASDAQ is actually down slightly — negative 0.2 percent over the same period. So the broad market is strong, but tech-heavy indexes are lagging. Luna: And that's partly because the SpaceX hype is already priced into certain names, and those names are now seeing profit-taking ahead of the actual IPO? Lucas: I think that's part of it. Look at CrowdStrike, which is up 3.6 percent in five days — that's a cybersecurity company with no direct SpaceX link. But then you have Cloudflare down 7.8 percent, Palantir down 6.2 percent. Those are high-growth names that had a lot of speculative froth, and some of that froth was tied to the broader 'Musk ecosystem' narrative. Luna: So as SpaceX gets closer to its public debut, the market is repricing those correlated names. That's a kind of unwinding of the indirect exposure you described. Lucas: Right. And the magnitude here is enormous. Prediction markets are pricing SpaceX to close above a two-trillion-dollar market cap on its debut. That would make it one of the largest companies in the index on day one. The S&P 500 committee will have to decide how quickly to add it — they typically wait for four consecutive quarters of positive earnings, but they can accelerate for mega-cap IPOs. Luna: But even before that formal addition, the passive money is already circulating. It's like the index funds are front-running their own future holdings. Lucas: Exactly. And that creates a self-fulfilling prophecy. The more money flows into passive funds, the more those funds have to buy the biggest stocks — which include Tesla and the other Musk-linked names — which then pushes up their prices, which increases the effective SpaceX exposure. It's a feedback loop. Luna: Honestly, if today's conversation helped you think about your portfolio a little differently, that's the link — buy me a coffee dot com slash fexingo. It's what keeps the show ad-free and independent. Lucas: Yeah, and we really appreciate that. It means we can keep digging into these mechanics without worrying about sponsors. So, back to the IPO mechanics — the SpaceX raise is reportedly 75 billion dollars, with retail allocation cut to the low 20 percent range. That means institutions and index funds will get the lion's share. Luna: So retail investors who want direct SpaceX shares might struggle to get them at the IPO price. They'll have to buy on the open market, likely at a premium. Lucas: That's the classic dynamic. And that premium could be substantial. If the prediction markets are right and the stock gaps to a two-trillion valuation, early buyers might see a quick pop, but the average retail investor buying on day two could be paying a very different price. Luna: It's also worth noting that the Fed funds rate is still at 3.62 percent — essentially flat. So the cost of capital hasn't changed much. That favours large, established companies over speculative growth stories. Lucas: Good point. The interest on reserve balances is 3.65 percent, so risk-free returns are still attractive. That puts pressure on high-growth names to deliver real earnings, not just narratives. Which is another reason why the rotation out of growth into value — which we've talked about in previous episodes — is continuing. Luna: But SpaceX is the exception, right? It's a growth story that's so big it's pulling capital from everywhere. Lucas: Absolutely. And that's what makes this moment unique. We have a company that's about to become a top-ten S&P 500 weight overnight, and the passive infrastructure has already been preparing for it for months. The index funds themselves are almost complicit in creating the demand. Luna: So what should a listener do if they want exposure? Buy Tesla as a proxy, wait for the IPO, or just add to their S&P 500 index fund and trust the system? Lucas: I think the simplest answer is the index fund. If you're already in a broad market ETF, you'll get SpaceX exposure automatically — first through the existing indirect holdings, then directly when the committee adds it. The risk of trying to pick individual names is that the correlation might break down after the IPO. We saw that with Uber and Lyft — there was a lot of cross-exposure hype, and then they traded independently. Luna: And the transaction costs of trying to front-run the index could eat into any potential gain. Lucas: Exactly. The data shows that for most retail investors, trying to time these events or pick proxy stocks underperforms just staying put. The S&P 500 is up over 20 percent year-to-date in 2026. The index is doing its job. Luna: So the takeaway might be: don't overthink it. The passive system is already doing the work for you. Lucas: I think that's right. But at the same time, it's worth understanding how it works — because these mechanics affect market stability. If too much passive money is chasing the same names, it can create distortions. The SpaceX IPO is a stress test for that system. Luna: And we'll be watching it closely. Thanks, Lucas. Lucas: Thanks, Luna. That's all for today.