BREAKINGVIEWS-SpaceX index thrust preys on market FOMO

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Sebastian Pellejero

NEW YORK, Feb 12 (Reuters Breakingviews) - Public markets are desperate for fresh titans, and billionaire Elon Musk knows it. His rocket maker SpaceX is angling for light-speed entry into blue-chip stock indexes once it completes an initial public offering, potentially turning such funds into early buyers. Quicker inclusion would widen access to a far deeper pool of investors, helping steady a market debut that could exceed $1 trillion. There are stronger reasons, however, for gatekeepers to hold the line.

SpaceX's appeal is clear. Quick addition to broad baskets of stocks, as the Wall Street Journal reported is under consideration, would summon price-insensitive demand from retirement and other funds that mimic benchmarks managed by MSCI MSCI.N, Nasdaq NDAQ.O and S&P Global SPGI.N. Between options, futures and exchange-traded products, the market value linked to the S&P 500 .SPX ecosystem alone hit some $280 trillion in 2024, its designer reckons.

Grumblers have long complained of waning dynamism. The median age of a new stock issuer last year was 12 years, about a third older than historical norms. Promising upstarts are staying private longer, supported by a vast machinery of private capital, evidenced by software developer Databricks and payments processor Stripe, for two. In response, the argument goes, index managers should be eager to welcome newcomers to freshen the pool and give regular investors access to the best of what's available.

Fresh blood often comes at a high price, though. An index of U.S. IPOs is up about 120% since October 2013, lagging the S&P 500's more than 450% return. Shares minted in big IPO waves also go on to deliver especially weak longterm returns relative to the market, academic research has found.

Existing rulebooks intentionally slow things down. S&P Global’s marquee indices force companies to build a track record, profit included, before they can even be considered for inclusion. The Nasdaq-100 wants debutants to arrive months ahead of its annual shakeup and endure a three-month seasoning before eligibility.

Nasdaq is now weighing allowing some to join after just 15 trading sessions, and possibly enlarging the index temporarily rather than ejecting an incumbent. S&P's total U.S. market benchmark offers speedier inclusion for large and liquid IPOs.

Truly opening the floodgates, however, would turn the broad swathe of steady savers into momentum-chasers, making them subsidize hot, but unproven, companies. A $1 trillion arrival hardly needs any help with popularity.

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CONTEXT NEWS

Rocket maker SpaceX has reached out to major index providers, including Nasdaq, to discuss how newly listed startups might join key indexes sooner than is currently allowed, the Wall Street Journal reported on February 4, citing unnamed sources. The company, started by billionaire Elon Musk, is targeting a valuation of more than $1 trillion in what would be the largest-ever U.S. initial public offering.

(Editing by Jonathan Guilford; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on PELLEJERO/ Sebastian.Pellejero@thomsonreuters.com))