For fund managers tracking indices, "not buying" is equivalent to "shorting" under a relative return framework, and they face the pressure of passive buying regardless.

Written by: Long Yue

Source: Wall Street Jinwen

SpaceX is set to complete its IPO this Friday. According to an analysis released on June 10 by the Financial Times' Alphaville column, U.S. mutual funds and ETFs will need to accumulate over $14 billion worth of SpaceX stock between the completion of the IPO and July 3—not because these fund managers believe SpaceX is worth that price, but because they simply do not have the freedom to "remain neutral."

Not buying SpaceX is the same as shorting SpaceX

For fund managers who measure their performance against market indices, they are essentially doing one thing: overweighting stocks they are optimistic about and underweighting (or not holding) stocks they are not optimistic about. However, "underweighting" in mathematical terms is equivalent to "shorting"—if that stock rises, they will have to explain to clients why they underperformed the benchmark.

Once SpaceX enters the index, it will automatically receive a certain index weight. If fund managers do not buy, their holding weight will be below the index weight, which, under a relative return framework, is no different from shorting.

In the words of Alphaville: "For these types of fund managers, not buying SpaceX is functionally identical to shorting SpaceX."

Index providers collectively "green light," the true driving force behind this buying spree

The reason for the scale of this passive buying spree is fundamentally due to recent intensive modifications of rapid inclusion rules by major index providers.

• CRSP and Nasdaq: Modified the rules for rapid inclusion of mega-cap IPOs to either accelerate inclusion speed or relax the requirements for free float share ratio.
• FTSE Russell: Adjusted rapid inclusion rules to align more closely with its FTSE GEIS series.
• S&P Dow Jones (S&P DJI): Although currently keeping SpaceX out of the S&P 500, the rules have been modified to shorten the time window for inclusion in its "total market index" series.

The inclusion timelines vary for each index: CRSP, Russell, and S&P DJI series include after 5 trading days post-IPO; MSCI includes after 10 trading days; Nasdaq waits for 15 trading days, and if the free float shares are less than one-third, it will count with three times the weight.

$14 billion, flooding in three waves

Researchers at Morningstar carefully reviewed the prospectuses of 6,006 U.S.-registered mutual funds and 5,100 ETFs, identifying 3,203 different benchmarks that cover $41.1 trillion in assets under management, and sent the data to Alphaville.

Alphaville's calculations indicate that the $14 billion in SpaceX stock buying will occur in three concentrated timeframes:

• June 19: Approximately $8.5 billion
• June 26: Approximately $1 billion
• July 3: Approximately $4.7 billion

Total: $14.2 billion.

This figure has two important points of reference:

First, if the S&P 500 committee had initially chosen to include SpaceX in the S&P 500, this figure would be approximately $11 billion higher.

Second, if each index committee had maintained the original rapid inclusion rules without making any modifications, this figure would have been only about $1 billion—meaning the collective adjustment of index rules directly "created" about $13.2 billion in forced buying demand.

Moreover, this $14.2 billion is only a part of U.S. mutual funds and ETFs. Pensions, insurance companies, endowment funds, and all overseas institutional investors are not included.

Valuation dispute remains unresolved

SpaceX's current valuation is approximately $1.75 trillion, equivalent to about 92 times last year's revenue.

For this company under Musk, there is a clear division in the market regarding its valuation. Alphaville directly describes it as a "loss-making value telecom firm"—this characterization itself is highly contentious and reflects the lack of consensus in the market on how to price SpaceX.

However, for fund managers tracking indices, this question may not be important. They are not facing "Is SpaceX worth this price?" but rather "What is the cost of not buying?"

Alphaville's conclusion is: "We are uncertain whether Musk can send humans to Mars. But this round of intensive modification to index rules suggests he will almost immediately exert gravitational pull on various investment portfolios."