By Christopher Collins
About the author: Christopher Collins is a fellow with the Polycrisis Program at the Cascade Institute at Royal Roads University
In finance, complex terminology is frequently used to describe simple ideas. Cynics argue this is deliberate obfuscation; impenetrable language keeps average investors from seeing the simplicity of the underlying concepts or grasping unfavorable conditions.
"Exit liquidity" is one of these terms. This technical-sounding phrase really just means "bag holders."
To be exit liquidity is to be the person whose purchase of an asset lets earlier investors cash out, often just before the price collapses. Following SpaceX's blockbuster initial public offering last week, millions of average Americans risk becoming exactly that -- even though most never chose to buy a single share. The purchases will be made for them, automatically, over the coming weeks.
Conventional wisdom has long said that retail investors should buy cheap funds that passively track the major indexes, since these index funds generally outperform actively managed funds. Through their 401(k)s, target-date funds, and IRAs, more than half of American households hold equities that passively track indexes like the Nasdaq 100, the S&P 500, and the Russell 1000. Many pension funds also hold substantial positions in these index funds.
The logic is sound: If you can't beat the market, buy the market. But this passive strategy is only as strong as the rules governing which companies make it into the indexes.
Inclusion rules, set and enforced by each index provider, typically demand that companies trade publicly for about a year before admission. This waiting period, known as "seasoning," allows volatility surrounding a company's IPO to fade and gives the market time to find a reasonable price. The most widely tracked benchmark of all, the S&P 500, demands more still: A company has to make money before it can join.
SpaceX clears neither bar. It is days old as a public company, and according to its IPO filings, the company lost $4.9 billion in 2025. While the banks underwriting the IPO forecast trillions in annual revenue by 2040, such projections are as speculative as they are convenient, given that those same banks stood to earn hundreds of millions in fees from the offering.
Hyped tech companies led by high-profile founders are nothing new -- Tesla, Elon Musk's other firm, has long traded at an eye-watering price-to-earnings ratio, as have a roster of other tech favorites whose stock prices have consistently outrun conventional measures of profit. The issue with SpaceX is how index inclusion rules were changed to rush the company into index funds.
Last month, Nasdaq changed its rules to grant SpaceX "fast entry." The MSCI and the FTSE Russell indexes have also granted SpaceX early entry. In the weeks ahead, when SpaceX is added to these indexes, passive funds tracking them will have no choice but to buy it in the open market, at peak hype, before the market can discover what the company is actually worth.
To its credit, the S&P has refused to change its index inclusion rules, so SpaceX won't be added to index funds tracking the S&P 500 on this accelerated timeline. This lone holdout is clarifying: If one index gatekeeper could keep its standards, the others didn't have to lower theirs. They chose to.
Making matters worse is how SpaceX is governed. Musk has almost total control; he can't be removed as chief executive without his consent, and the firm is exempt from the usual requirement for a majority-independent board. Some of the largest U.S. public pension funds warned this is "novel and extreme." A major Danish pension excluded SpaceX from its holdings, due in part to this "catastrophic governance structure."
The standard theory of shareholder capitalism holds that management is accountable to owners. But with SpaceX, millions of Americans will become owners of a company with a controlling shareholder who has placed himself beyond the reach of board oversight or shareholder votes. Their funds must hold what the indexes hold, even if they, as owners, have no oversight over the company.
When enforced, index inclusion rules act, in effect, as consumer-protection rules. Yet these rules are written and enforced not by the Securities and Exchange Commission or any other public body, but by the handful of private companies that manage the indexes. And now these firms have quietly become some of the most powerful unelected regulators in American finance.
SpaceX won't be the last mega-IPO fast-tracked for index inclusion; OpenAI and Anthropic have both filed to go public. Before these occur, we must reform index inclusion, starting by acknowledging it for what it has become: de facto financial regulation. The SEC should examine whether index providers' rule changes for individual companies constitute the kind of conflicted, ad hoc standard-setting that would never survive scrutiny if a public regulator did it. Fund managers and 401(k) sponsors, who owe fiduciary duties to savers, should pressure providers to restore seasoning requirements, or offer alternative indexes that retain them so passive investors have a choice.
Meanwhile, the rules meant to protect ordinary savers have been dismantled by some of the gatekeepers entrusted to enforce them. All of us now risk becoming someone's exit liquidity -- left holding the bag after the smart money has cashed out and blasted off.
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(END) Dow Jones Newswires
June 19, 2026 21:31 ET (01:31 GMT)
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