SpaceX Set to Join Nasdaq-100, Triggering Expected Wave of Passive Investment Buying

SpaceX, set to be added to the Nasdaq-100 Index, will likely attract billions in passive buying from one of the world's most watched equity benchmarks, forcing passive money managers into significant purchasing that could propel the rocket builder’s stock. The move is one of the most significant events for the private company after a blowout initial public offering this week and the latest validation of its ascent to becoming one of the largest public tech companies in terms of valuation. Passive money managers, whose investment vehicles aim to mirror an index's constituents rather than actively pick securities, must acquire stakes in companies as they join major indexes like the Nasdaq-100. Index funds such as theNasdaq-100, which have hundreds of billions of dollars invested around the globe, will need to buy shares of the space company.

Such passive buying typically boosts companies’ shares by several percent in the days after they join a major index, according to index-weighted strategies which some of the largest tech-ETFs use.

The inclusion comes shortly after SpaceX launched shares to public investors. After an initial frenzy push shares higher, the company’s stock suffered some choppiness as investors revalued its growth prospects. Having a chunk of passive investment flow is expected to give those “passive flows, which are essentially like buying a forced buy by some of the big passive investors into one of the biggest baskets of tech stocks, is a big deal,” said Adam Lisk, co-head of Americas equities at Global X ETFs. Adding the name to an important index helps the broader market, in the eyes of many, identify its prominence.

Even while it’s mostly recognized for blasting rockets and building satellites, the business has branched out into satellite broadband (Starlink), commercial human space transportation, government contracts, space exploration technology and cutting-edge aerospace manufacturing.

”SpaceX has, in the eyes of the investment community, transcended being ‘just’ a rocket company into a kind of integrated new space and tech infrastructure company,” Mr. Lisk said. It may also provide more stability to existing holders.

For larger public companies already in indexes like the S&P 500, the addition can help stabilize their stock prices by making them attractive for index-tracking products, a fact that can widen their shareholder bases and increase liquidity. In addition, it is often a cause for analysts to cover them and more attention from institutional investors that utilize index data to determine where to invest. But analysts note there’s limits to index inclusion benefits.

“While a new stock joining an index will likely benefit from the inevitable short-term demand associated with the move, and certainly the prestige that comes with being part of a globally important index like the Nasdaq-100, its ultimate stock performance hinges on fundamental factors like revenue growth, profit margins, product demand, management effectiveness, and company valuation,” Mr.

Miller said. However, the inclusion underscores the enormous clout that passive investing now holds in financial markets. Passive-weighted funds have accumulated trillions in assets over the past decade and the addition to major benchmarks is a significant event. “As passive indexing has grown in significance, inclusions in major indexes have become powerful catalysts,” said Quincy Krosby, global strategist at LPL Financial.

The space venture’s addition to the Nasdaq-100 further indicates a shift by investors toward new-economy names for the major US equity indexes that include not only growth companies but also emerging sectors.

“Next-generation technology is the leading sector in the equity markets today and is shaping the content of many of our global indexes, whether through companies that develop artificial intelligence, provide cloud services, manufacture semiconductor chips or develop space technology,” said John L. Jacobs, executive director and CEO of Nasdaq's Global Indices & Analytics unit. As SpaceX makes the transition to life in one of the world’s best known tech benchmarks, it can probably count on a influx of fresh investor cash to further fuel its rocket ships.