(Bloomberg) — SpaceX’s stock has started to lose momentum after its blockbuster market debut. But investors betting against Elon Musk’s newest public company will soon face a different force: billions of dollars in mechanical buying as the stock enters major indexes.
FTSE Russell is poised to add Space Exploration Technologies Corp. to its flagship US and global benchmarks, including the Russell 1000, on Monday. About one week later, the stock will join the Nasdaq 100. The additions are set to spur buying worth at least $5.4 billion from index-tracking funds, according to an estimate from Bloomberg Intelligence strategist Rob Du Boff.
The passive buying comes as the initial frenzy over SpaceX’s record IPO has fizzled. The stock is on a losing streak, shedding a quarter of its value after a rousing rally in the first three sessions. Some investors have begun building short positions on the concern that the company may take years to make a profit, leaving the stock looking overvalued.
Anyone betting against the stock may want to heed the passive wave about to hit. Index-tracking funds, including products such as the Invesco QQQ Trust, will have to buy SpaceX within weeks of its debut after major index providers shortened the wait for eligible IPOs to enter their benchmarks.
Critics have warned that those funds may distort the post-IPO price discovery process as they tend to follow indexes blindly with no attention paid to valuations or company fundamentals. For short sellers, it may prove an uphill battle with passive money set to be on the opposite side of the trade.
“With most of these large-cap index names, there are usually so many long holders that short sellers cannot compete in relative size,” said Ihor Dusaniwsky, managing director at S3 Partners. “Positioning is important. What you don’t know may blow up in your face or take you to the moon.”
S3 data show that while shorting SpaceX carries a cost, shares remain readily available to borrow. Almost 45 million shares, or 7% of its public float, are currently available, with borrowing costs last settling near 0.6% — double the level for easy-to-borrow stocks such as Tesla Inc.
Separate data from S&P Global Market Intelligence also pointed to a pickup in bearish positioning. S&P’s securities-lending data showed its measure of short interest rose to 0.6% as of Wednesday. At the same time, the borrow fee has fallen sharply since the stock’s listing, from 2.5% to around 0.3%.
“Supply has expanded quickly enough to absorb the additional short demand without creating meaningful financing pressure,” said Matt Chessum, executive director of equity & analytic products at S&P Global. “The lending data suggests a more cautious near-term price outlook, with incremental downside or consolidation likely unless new buyers return.”
This time, the buyers won’t be making a judgment about SpaceX’s prospects. Index-tracking funds will have to buy the stock as it joins major benchmarks over the next two weeks, creating a fresh source of demand regardless of valuation or momentum.
FTSE Russell recently adopted rules allowing eligible mega IPOs to enter its indexes after five trading days. But because SpaceX went public during the provider’s three-week reconstitution blackout period, it missed that fast-entry window and will instead join Russell indexes after Friday’s close — with the change taking effect Monday — as part of the scheduled semiannual reconstitution.
SpaceX would carry a 0.136% weighting in the Russell 1000, making it the index’s 118th-largest constituent, based on Bloomberg Intelligence calculations using the company’s June 12 closing price of $160.95.
That would force passive funds tracking the Russell 1000 to buy about $500 million of SpaceX shares, according to BI. The number climbs sharply when active managers benchmarked to the index are included: assuming they seek to remain market-neutral, demand could reach $8.2 billion, or more than 10% of SpaceX’s public float.
The next wave of index-induced buying will arrive roughly one week later, when Musk’s new listing joins the Nasdaq 100. By BI’s estimate, that’s another $4.9 billion of purchases. admit qualifying IPOs. S&P Dow Jones Indices, a unit of S&P Global that oversees benchmarks including the S&P 500, recently decided to keep its existing eligibility requirements, closing the door to fast entry.
With passive buying in the near term, short sellers may find themselves in a disadvantageous position for now. Yet the supply and demand dynamic is likely to shift in their favor, when insider lockups expire in the coming months, according to Dusaniwsky.
In a scenario where insider selling triggers a drop in SpaceX shares, passive funds could end up reinforcing the move, as falling prices reduce index weights and eventually curb demand from benchmark-tracking investors.
“The grease on the skids for the shorts is when the pre-IPO long lockups expire and the long sellers with large mark-to-market profits trade in lockstep with the short sellers,” Dusaniwsky said.
