SpaceX’s weighting in the Nasdaq-100 will increase significantly on Monday, September 21. The stock will rise from 1.28% to 2.82% of the entire index. We will explain why below; for now, the most interesting point is that billion-dollar funds that passively replicate the index will be forced to buy SpaceX shares. Before assuming that the price will surge, it is important to understand how the entire process will work.

The increase in SpaceX’s weighting within the fund is linked to the increase in its free float, meaning the number of the group’s shares that are actually available on the market. This amount has increased significantly following the unlocking of shares held by early investors, which are now available.

The figures behind the change

Until Sunday, SpaceX will account for 1.28% of the entire Nasdaq-100 index. From Monday’s session, it will account for 2.82%. This is a significant increase, more than doubling the number of shares that indices tracking the Nasdaq-100 will have to hold in relation to SpaceX.

The simplest conclusion is that, since many funds will have to rebalance and therefore buy SpaceX shares, the stock can only rise in price. The situation is not that straightforward.

• ETF tracking error

ETFs seek to minimize tracking error, meaning the difference between the value of the fund and the value represented by the Nasdaq-100. For this reason, in these circumstances, they generally concentrate their orders close to the closing auction in order to minimize the discrepancy. In practice, they all seek to obtain a price close to the one used by the index.

• Buy the rumors, sell the news

There is another aspect to consider. The event has been known for some time, and many investors may have tried to anticipate these purchases by buying in advance. In addition, once the pressure that could come from ETFs passively tracking the index has ended, the stock could also move in the opposite direction.

Another historic case, once again involving an Elon Musk company

The case that will come to many investors’ minds is that of another company owned by Elon Musk. It was mid-November 2020, and the S&P 500 was preparing to add Tesla to the index from scratch, including its entire free float. At the time, this involved forced purchases worth more than $70 billion.

The transaction was so large that, for a time, the possibility of splitting it into two parts was also discussed. The decision was ultimately made to proceed with the entire transaction at once.

The announcement came on November 16, and Tesla recorded a major price increase. The inclusion was actually scheduled for December 21, and substantial buying did indeed take place through December 18. Tesla gained approximately 70% in one month.

On December 21, when the stock was officially included in the index, it ultimately fell 6%. This situation may not be repeated, but it is nevertheless worth keeping in mind.