The largest IPO in history is coming, with about 30% of SpaceX's circulating shares likely to be locked up by passive funds within 15 days of its listing, far exceeding the conventional level of 4%.

Written by: Zhao Ying

Source: Wall Street Journal

SpaceX is about to set the record for the largest IPO in history, but the controversy surrounding this listing goes beyond the valuation itself—the mechanical buying from index funds is raising deep concerns in the market about price distortions.

According to a report by Bloomberg on Wednesday, the index rebalancing forecasting organization Intropic estimates that, due to the fact that Nasdaq, FTSE Russell, and MSCI all plan to quickly incorporate SpaceX into their indices, within just 15 days after listing, the proportion of circulating shares held by passive investors is expected to reach about 30%. In contrast, if the previous slower inclusion rules were followed, this percentage would only be about 4%.

Academics and market observers warn that this scale of mechanical demand, combined with the market's fervent emotions towards Musk, SpaceX, and artificial intelligence, could create a self-reinforcing feedback loop that pushes stock prices continuously higher.

This dynamic makes SpaceX's IPO not only the largest in history but also a significant market stress test for the influence of passive investing.

Three major indices compete to rapidly include, the size of passive demand is unprecedented

Both Nasdaq and FTSE Russell have revised their rules to pave the way for SpaceX's early inclusion in the indices, and MSCI also plans to follow suit. Data from Intropic shows that the coordinated action of the three index providers will lock about 30% of the circulating shares in the hands of passive investors within a very short time after SpaceX's listing.

Marco Sammon, an assistant professor at Harvard Business School who has long studied the market impact of passive investing, points out that the major index providers are rushing to quickly include SpaceX due to an underlying logic of benchmark competition. "Every index provider is eager to include SpaceX in their index, one important reason is the implicit competition among the benchmarks," he says, "This seems to be a case where index methodology, rather than fundamentals, could have a huge impact on prices."

Nasdaq economists Phil Mackintosh and Nicole Torskiy defended the rapid inclusion mechanism last week in a blog post, arguing that this move helps the indices better represent publicly traded companies that are truly important to the economy and citing data from 2010 to 2025 indicating that stocks that enter the Russell 1000 index first tend to outperform those in the S&P 1500 index.

The "shadow tax" effect: arbitrage window compressed, passive investors forced to buy at high prices

In a normal index inclusion process, professional arbitrageurs such as hedge funds and market makers typically build positions gradually in advance and then transfer holdings when index funds need to buy, thus smoothing price impacts. However, the rapid inclusion mechanism has significantly compressed the time window for arbitrageurs to build their positions.

Research papers co-authored by Marco Sammon, John Shim, and Stefano Pegoraro from Notre Dame University show that when the inclusion window is compressed, mechanical demand of equivalent size is more likely to lead to larger short-term price impacts, followed by corrections. His research with Harvard colleague Chris Murray on index provider CRSP also found that companies quickly included tended to outperform the market by about five percentage points before inclusion, but these excess returns would be given back within three weeks.

"When the window is compressed, mechanical demand of equivalent size is more likely to produce relatively larger short-term price shocks and subsequent corrections," Sammon states, "This effect is further amplified by the generally high volatility and poor liquidity of the market after an IPO. In this case, the costs borne by index fund investors will be higher."

This essentially constitutes a "shadow tax" on passive investors—they have to buy at high prices, and the issuing company cannot directly sell shares to index-tracking funds.

The "reflexivity cycle" risk: index mechanisms may interfere with price discovery

In a report released on June 8, Intropic warned that the passive demand faced by SpaceX could generate a "reflexivity cycle": the scale of passive fund inflow across the indices depends on SpaceX's market capitalization on the ranking benchmark date; meanwhile, that market capitalization itself could be briefly inflated due to the mechanical buying from arbitrageurs building positions early, which, in turn, amplifies the scale of passive fund inflow.

This cycle could even extend to the IPO pricing stage—if the investors participating in the subscription are themselves betting on subsequent passive fund buying, then the IPO price will also be distorted.

"The price impact of passive fund flows is temporary, but it may interfere with price discovery at the most critical junctures of the company's market journey," wrote the London-based institution.

It is worth noting that S&P Dow Jones Indices has rejected proposals that would allow SpaceX, OpenAI, and Anthropic to be included early in the S&P 500 index. According to Bloomberg, passive investment tools currently account for about 60% of U.S. equity funds and control about one-fifth of the market capitalization of the S&P 500. Market concerns about the distortion of trading and prices due to index investing have long existed, and SpaceX's IPO is bringing this issue to the forefront.