The largest IPO in history is underway: within 15 days of SpaceX’s listing, approximately 30% of its free-float shares could be locked in by passive funds—far exceeding the typical level of 4%. Nasdaq, FTSE Russell, and MSCI are racing to accelerate its inclusion in their indices. Combined with Elon Musk’s AI-driven market euphoria, this dynamic is fueling a 'reflexive feedback loop': mechanical buying pushes up the share price, which in turn amplifies inflows from passive investors. Academic research shows that companies rapidly added to major indices tend to outperform the market by about five percentage points ahead of inclusion, but this excess return typically reverses within three weeks.
$Space Exploration Technologies (SPCX.US)$ It is poised to set a record for the largest IPO in history, but concerns surrounding the listing have gone beyond valuation itself—mechanical buying by index funds is fueling deeper market worries about price distortions.
According to Bloomberg on Wednesday, Intropic, a firm that forecasts index rebalancing effects, estimates that because Nasdaq, FTSE Russell, and MSCI all plan to rapidly include SpaceX in their indices, passive investors are expected to hold approximately 30% of SpaceX’s free-float shares just 15 days after its listing. By comparison, under previous, slower inclusion rules, that figure would have been only around 4%.
Academics and market observers warn that this scale of mechanical demand, combined with market euphoria surrounding Elon Musk, SpaceX, and artificial intelligence, could create a self-reinforcing feedback loop that drives the share price ever higher.
This dynamic means SpaceX’s IPO is not only set to become the largest in history but also serves as a major real-world stress test of the influence of passive investing.
Three major index providers racing to fast-track inclusion, unleashing unprecedented passive demand
Both Nasdaq and FTSE Russell have already revised their rules to pave the way for SpaceX’s early inclusion, and MSCI plans to follow suit. According to Intropic’s data, the coordinated actions of these three index providers will lock approximately 30% of SpaceX’s free-float shares into passive investor portfolios within an extremely short timeframe after listing.
Marco Sammon, Assistant Professor at Harvard Business School who has long studied the market impact of passive investing, noted that the rush among index providers to quickly include SpaceX stems from an underlying logic of benchmark competition. "Each index provider is eager to add SpaceX to its index largely because there is implicit competition among benchmarks," he said. "This appears to be a case where index methodology—not fundamentals—could significantly influence price."
In a blog post last week, Nasdaq economists Phil Mackintosh and Nicole Torskiy defended the fast-inclusion mechanism, arguing it helps indices better reflect companies that are truly important to the economy. They cited data from 2010 to 2025 showing that stocks added earlier to the Russell 1000 Index generally outperformed those in the S&P 1500 Index.
"Shadow tax" effect: Arbitrage window narrows, forcing passive investors to buy at elevated prices
Under normal index inclusion procedures, professional arbitrageurs such as hedge funds and market makers typically build positions gradually in advance and then sell those holdings to index funds when they are required to buy, thereby mitigating price impact. However, the fast-inclusion mechanism drastically compresses the time window available for arbitrageurs to accumulate positions.
Research co-authored by Marco Sammon with John Shim and Stefano Pegoraro of the University of Notre Dame shows that when the inclusion window is compressed, mechanical demand of equivalent size is more likely to generate larger short-term price impacts followed by reversals. His joint study with Harvard colleague Chris Murray on index provider CRSP also found that companies rapidly added to an index outperformed the market by approximately five percentage points ahead of the inclusion date, but this excess return was fully reversed within three weeks.
“When the inclusion window is compressed, mechanical demand of equivalent size is more likely to produce relatively larger short-term price impacts and subsequent reversals,” Sammon stated. “This effect is further amplified by the generally high post-IPO market volatility and poor liquidity. In such circumstances, index fund investors incur higher costs.”
This effectively constitutes a 'shadow tax' on passive investors—they are forced to buy at elevated prices, while issuing companies cannot directly sell shares to index-tracking funds.
Risk of a 'reflexive loop': Index mechanics may distort price discovery
In a report released on June 8, Intropic warned that SpaceX’s passive demand could trigger a 'reflexive loop': the scale of passive inflows from index funds depends on SpaceX’s market capitalization as of the index ranking reference date; yet that market cap itself may be temporarily inflated by mechanical buying from arbitrageurs front-running the inclusion, which in turn amplifies the scale of passive inflows.
This loop could even extend to the IPO pricing stage—if subscribing investors are themselves betting on subsequent passive buying, then the IPO price itself would be distorted.
“The price impact from passive flows is transient, but it can interfere with price discovery at the most critical junctures of a company’s public market journey,” wrote the London-based firm.
Notably, S&P Dow Jones Indices has rejected proposals that would have allowed SpaceX, OpenAI, and Anthropic to be fast-tracked into the S&P 500. According to Bloomberg, passive investment vehicles currently account for about 60% of U.S. equity funds and control roughly one-fifth of the S&P 500’s total market capitalization. Concerns about index-driven distortions to trading and pricing are longstanding, and SpaceX’s public listing is now thrusting this issue into the spotlight.
Editor/joryn