SpaceX index inclusion raises volatility risk for U.S. passive investors

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SpaceX index inclusion risk

Highlights

Major index providers including CRSP, Nasdaq, FTSE Russell, and MSCI are integrating SpaceX, now valued at $2.7 trillion after a 4.5% rally.
SpaceX implied volatility near 120—three times that of IBIT—marks it as the S&P 500 and Nasdaq 100's most volatile stock and the only unprofitable $1 trillion-plus firm.
Later-dated SpaceX options suggest implied volatility may decline after the insider lockup expires, as passive inflows and increased liquidity from index inclusion take effect.

Index changes bring SpaceX into mainstream funds

As reported by CNBC, CRSP market indexes, Nasdaq, FTSE Russell and MSCI have all made accommodations to integrate SpaceX into their large-cap trackers. With an estimated market value of $2.7 trillion after Tuesday's 4.5% rally, the company would rank as the world's fifth-largest and is likely to lift volatility at the index level.

Ayman Saidi, partner at Strategic Investment Solutions in Orland Park, Illinois, says the change effectively forces some advisers and money managers to own the stock through passive products. He says Vanguard and other large managers following index rule changes are exposing U.S. savers to a company he views as a source of major market distortion.

SpaceX is compared in the article to bitcoin because it has no earnings, no yield and a strongly polarized investor base. Unlike bitcoin, however, investors in widely held index products may end up owning SpaceX automatically once the stock is added to benchmark-linked funds.

Volatility concerns split market participants

SpaceX implied volatility stands near 120 on Tuesday, roughly three times the level of the iShares bitcoin ETF, IBIT. Based on Tuesday's trading, that would make it the most volatile stock in the S&P 500 and Nasdaq 100, as well as the only company worth more than $1 trillion that does not make money.

Kevin Kelly, co-founder of Delphi Digital, says investors with a low tolerance for sharp price swings may prefer bonds, arguing that speculative trading already dominates parts of the artificial intelligence market. He adds that SpaceX remains so polarizing that some traditional investors may struggle to accept it even at a far lower hypothetical initial public offering valuation.

Some investors may take comfort from signs that volatility could ease over time. Later-dated SpaceX options show implied volatility starting to decline beyond the insider lockup period, and Noel Smith, chief investment officer and founder of Convex Asset Management, says index inclusion itself could reduce volatility as high-frequency trading, passive inflows and deeper liquidity help smooth trading.

Our earlier report on SpaceX’s post-IPO rally described how the stock’s rapid surge pushed its valuation into the top tier of U.S. companies, at times overtaking major megacaps. We also noted the growing debate over whether the company’s soaring market cap is justified given continuing losses and the execution risks still facing its business.

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