ETF Edge - SpaceX and Indexing 6/29/26

Episode Date: June 29, 2026

Thanks to fast-tracking, SpaceX is already part of the Russell 1000 and soon to be part of Nasdaq 100. Will other mega-IPOs pursue the same route to adoption and what could it mean for index-tracking ETFs?         Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors.

I'm your host, Dominic Chu. SpaceX stock is on the fast track into the Futsi Russell 1000 indices and the NASDAQ 100 as well, what will that mean for the range of index tracking ETFs that now have to adjust their holdings and what will it mean for the future mega IPOs that are on deck a la open AI and impropic? Here's my conversation with Arna Noak, the Footsie Russell head of equity and multi-asset indices for the Americas alongside Nick Ryder, the chief investment officer over at Kathmir Capital. I'd like to start, first of all, with kind of the news of the moment, and that's going to be to you, Arna.

The Russell reconstitution now happens twice a year. It used to happen more frequently on a quarterly-type basis. Can you take us through a little bit about just how much that reconstitution played out in your mind? Was it smooth? And then, of course, how exactly did SpaceX really impact the way that these indices are reconstituted and rebalanced? Yes, so Dominic, thank you for having me. As you rightfully pointed out, last Friday was the first semi-annual reconstitution since Russell decided to change back to a semi-annual schedule.

Essentially since the late 80s, the Russell indices have been on an annual cycle. We now get to have that pleasure twice a year. And what makes this one perhaps special in the public eye is, in fact, that SpaceX, in the meantime, went public and was part of the index. inclusion as of technically speaking open of business today. Of course, you know, as with most Russell index reconstitution, there was a major trading event across the NIC and the NASDAQ. We traded around, or the market traded around $550 billion worth of stock that entered and left the different Russell indices. So one of the major liquidity events in the calendar year.

You mentioned a lot of the money that moves around. That affects ETF investment. investors, mutual fund type investors, because these things have to be kind of readjusted and whatnot. Just how much do ETF investors have to pay attention to something like a Russell Reconstitution event? It used to only happen once a year. Some people say it should happen a little bit more frequently. Others say that this is no, it happens too often anyway. But why exactly do investors need to be conscientious of how those rebalancings play out? And how different are they? How much do they actually change in terms of the index components or weightings on any given year? Yes. So it really depends on the situation at hand and which index you're looking at.

So for example, if you're looking at the Russell 3000, which includes the largest 3,000 stocks, it's almost an all-market, all-cap type of index, there the changes are more gradual, there tends to be a little bit less turnover. If you look at style indices, such as, for example, the Russell 1000 growth or value, there you can and tend to see higher turnover. So for example, one of the recent events that I would say is not worthy of highlighting is that the Mag 7s have gradually shifted from really being embedded in the growth universe to now actually being well represented in the value universe. As of the last year, with about 7% of Russell 1 value weight in Max 7 stocks,

Now it's about 16. Oh, interesting. So, Nick, from an investment advisor's perspective, these reconstitutions are something that many investment advisors focus on because it does affect kind of some of the components, the style, the weighting of the holdings that clients do have in their portfolios. How closely did you and the rest of Kathmir track the Russell reconstitution and just how much does it play out into your investment thesis

when you look at kind of how things shift around in some of those benchmark indices. Yeah. Great to be here, Dom. It's something we monitor, we watch, but I wouldn't say it's influencing our decision-making day-to-day. We remain proponents of indexing as the baseline for investment strategy. We think indexing has been demonstrated empirically to be a very highly effective investment strategy.

We rely on it kind of as the core building block for our clients, global equity portfolio construction. As it relates to the reconstitution, we are looking at it, we monitor it, but it's certainly not changing the way worth thinking about portfolio construction. Right now, again, it's interesting to see how when we've seen the MagS7 underperform over the year-to-day period when none of the Mag7 stocks outperform the overall market, as you guys just mentioned how it's increasingly shifting some of its allocation into the value, construct. Again, we just look at it as one component of the overall portfolio construction, but it's certainly not anything that's driving how we're managing things on a day-to-day basis.

Nick, how have you guys treated what happened with SpaceX over the course of the past couple of weeks here, from its IPO to where we are right now? Did it play a significant part in maybe some of the thinking that you were doing behind the scenes about the types of clients who are maybe suited for that kind of investment? Are you guys active in SpaceX? Do you guys, you? You have it in portfolios. You use the exposure more in some of these ETF-type instruments. You mentioned that indexing is a key component, a core component of it. But just how much does the SpaceX kind of IPO and then its index inclusion, not just in the Russell 1000 right now, but soon to be for the NASDAQ 100 itself, how does an investment advisor treat some of the high-profile ETFs like that when they come to devising strategies for their clients?

Yeah, I think a couple of things related to it. One, we're generally not heavy participants in the IPO markets. We have helped in the past facilitate our clients get allocations to I profile ones like SpaceX. I did notice just behaviorally this SpaceX IPO had gained a lot of popular attention that we received a decent amount of inbound inquiries from our clients. I've talked to other peers in industry and saw a similar, similar passion. where there's a lot of end client retail investor interest, but it's again, not something that we're actively out there pushing to our clients. And the reason for it being is I think there's this notion in the market that IPOs are somehow free money. And that is just not supported by the data empirically. There have been a handful of analysis. Jay Ritter from the University of Florida maintains a pretty robust database on performance of IPOs. And you have seen going back over the last nearly 40 years. First day pops have been significant to the tune of about 19% on average. However, the three years following that first day close, on average, IPOs have trailed the market

weighted market index by roughly 20% cumulatively. And so we look at it and say there's often a lot of hype and enthusiasm out of IPOs. If you're able to skewer it at the IPO price, things have worked out fine for investors. You've gotten a nice first day pop on average. They've lagged. I know there's another one from Jeff Lerner at Truis, the chief market strategist there, that had circulated a lot around the performance of 30 recent high profile IPOs where you saw out of those 30, I think it was only 13 that had positive first year performance. The drawdowns were significant along the first way. And so I think oftentimes you've seen a lot of hype and enthusiasm. These prices might get bid up quite a bit, have that initial pop and then come back down to earth. And so more than

anything, perhaps we've just been advising our clients with caution, I think during these times with these high-profile companies, particularly ones that have been building like SpaceX, like Open AI, Anthropic, to come that perhaps expectations might be getting a little carried away on the optimism side and just warranting caution that free money necessarily isn't always out there just for the taking. Now, Arna, it's also interesting as well because of the way that SpaceX has now worked its way into these indices. the, I guess, move that we have seen has been relatively smooth, the incorporation into the Russell 1000.

That's maybe by design, because it didn't come in straight as a Mag 7 type stock with a Mag 7 type weighting to these market cap weighted type indices. One of the other keys about this is in the Russell 1000, no individual stock is that big of a weighting compared to say some of the indices that have less components to it. there's a lot of components in the index. In the case of the Russell 1000, SpaceX enters at a roughly, call it, 12 basis point waiting for the Russell 1,000 large cap index.

I checked out the I shares Russell 1000 growth ETF, which it is now a part of as well, and it's a roughly 22 basis point waiting in that particular index. These are not massive, but that's by design. So can you take us through, why investors don't need to worry about some of the volatility around these IPOs, high-profile ones, when it comes to index inclusion at that particular level. Yes, that's correct, Dominic.

And I appreciate the nuance that you highlighted here because it is technically very important to understand how the weights are determined for individual companies inside an index. And so just to talk you through how this works. So let's say if there's an IPO, if that is in excess of 17 and 19. a half billion dollars in terms of market cap, then it becomes eligible for our new Russell US fast track rule, meaning that rule is designed to make sure that our Russell US indices, so essentially the Russell 3,000 and all of the different sub-components, accurately reflect the opportunity set of the US equity market. However, that doesn't mean that all of the large IPOs

then get included with their market cap because the Russell US indices are so called float-adjusted market cap indices, meaning what is relevant to determine a stock's weight inside the index is the float that is available, which in SpaceX's case is reasonably small. What obviously gets taken into account over time is any lockups as insiders are available to sell their shares and do sell them, and that additional free float is recognized by the index provider as such as free float, which gets typically checked. on a quarterly basis and could potentially lead to further increases in SpaceX, particularly as a weight in the Russell 1000 or the Russell 1000 growth later down down the line.

Now, we know that you are not responsible per se for the NASDAQ indices and whatnot, but from an indexer's standpoint, the NASDAQ 100 will is anticipated to include SpaceX as of July 7th. So we're talking about a little over a week from now at this stage. what exactly are the expectations as it becomes part of a broader picture in the index market, not just among, say, the Russell 1000, but eventually the NASDAQ like it will be, and then at some point down the line, hypothetically, the S&P 500. Yeah, and that journey that you highlighted is already well underway, because Futsi Russell as a company, we obviously not only have the Russell index family,

but also the Futsi index family, which is perhaps in the U.S. less well-known, but still tracks trillions of dollars in terms of benchmarking assets. And in fact, part of the Futsi U.S. series, or our Futsi Global Equity Series, SpaceX has also been included already, similarly with a few of our other index provider, colleagues, and competitors. So as we see different schedules and they tend to be a little bit staggered, there is broad inclusion for SpaceX. Obviously, as you point out, every index provider has a slightly different methodology

in terms of waiting. But given that SpaceX and potentially other sort of landscape IPOs form such an important part of the US equity opportunity set, one should expect those to be reflected in the key benchmark indices in the US. All right, Nick, if you are a benchmarker and index follower as a core component for portfolios like you are at Kathmir, how much do these individual stock stories play out in your mind with regard to the types of tools that you use?

In other words, if you use instruments like ETS, if you are single stock kind of reliant on putting portfolios together, how exactly do your methodologies change or do they not, given some of these massive IPOs that we've seen coming up, either with SpaceX already at market, or the expectations that we could see similar type moves from the likes of OpenAI and Anthropic later on down the line? Yeah, it's not really changing, as you alluded to. we generally start portfolio construction from the angle that markets do a pretty good job allocating capital and they're hard to beat. And as such, we default towards plain vanilla cap weighted passive indexing. And that could come implementation might differ by client, by a client account type. We build portfolios out of ETFs.

We'll also do long only direct indexing tax for long short versions. But fundamentally at a philosophical level, we start with baseline cap weighted indexing. And as it relates to some of these IPOs, as the discussion you just had around, right, at the massive market cap we're seeing with SpaceX around $2 trillion, its index weight being considerably lower than that, as you just alluded to, because of the small portion of shares being free-floated. So it's not a significant impact in the portfolio at the current level. Of course, that's set to grow as lockups expire and more shares are brought to market. And that will naturally see the weight increase. but notwithstanding that issue, again, starting with cap-weighted passive, we will deviate from that, where we'll tilt portfolios either within ETFs or on the direct security side toward empirically

awarded factors like value, quality, momentum, shareholder yield, etc. And we're just simply allowing a rules-based systematic process to favor stocks with attractive characteristics as defined by those factors and disfavor underweight stocks with unattractive characteristics. And so for us, we're very much proponents, at least within public equity markets, around broad-based diversification, low-cost, high tax efficiency, and then a systematic rules-based approach. And cap-weighted index is one of those flavors. Some of this modest tilting toward empirically rewarded factors are just another way. But we do not necessarily look at these mega IPOs coming to market as anything that's fundamentally changing the way we're going

about building portfolios for our clients. Interesting. Now, our one of the interesting debates that played out over the course of the last few months at this point leading up to the SpaceX IPO was just how willing certain index providers were to change the rules, alter them, to make sure that SpaceX would be kind of included on a more timely basis and one index provider in the S&P 500 and S&P Dow Jones indices to delay or not change their methodology to wait further on down the line. From an indexer's standpoint, can you take us through the pro and con argument for kind of like why certain indices and providers will tilt one way in terms of their philosophy or view and others will maybe change the rules and maybe try to seek

faster inclusion for some of these high profile indices. I ask because we will see them down the line hypothetically if and when open AI and anthropic come to market as well. Yes, absolutely. And I would say and preface by saying that it's good and important to have these conversations and to clearly understand sort of the different governance sets and rules sets that different index providers follow. So I'm happy to talk you through the process that we follow at Futsi Russell. So the Futsi Russell indices, and in particular in this case, the Russell U.S. Index series is governed by a set of very clear principles. And part of this is we want to listen to our index stakeholders and clients. And the listening to that set of community of stakeholders

is in the form either of direct feedback or our external advisory committees. And once through those committees we hear that there is a certain theme that is recurring, we tend to go to a consultation period. So what we did at the beginning of this year, we issued a broad public consultation, which essentially said, and I'm paraphrasing here, but essentially said, hey, we are hearing from our community of index users that there is potentially a number of very scaled, IPOs that come to market,

IPOs that have the potential or the market cap to be meaningfully impactful for the opportunity set of US equities, and you Russell, as in us, Russell, we want you to consider having a methodology that allows a relatively

quick inclusion of those because we believe as sort of index stakeholders that needs to be done in order for that to be represented. Now, of course, we fully acknowledge that as benchmark providers, you know, similar to Nick, who is an active manager, they might look on our benchmarks slightly differently from our passive clients and passive index trackers to our asset owners, to maybe academics who follow our benchmark. So we recognize the breadth of the

community that we service and that follow our indices. So what we do invite is a very honest and holistic feedback. We left that consultation open for about six weeks. And after that, the consultation period closes, we tally the results, we analyze the pros and cons, that goes into our internal governance process, our index governance board, then decides, okay, here's the pros and cons, and these are the results that we implement. So that's the process that we follow. I have to say, I'd never worked for another index provider, but I would fully imagine that similar stringent processes are in place over there as well. And really, the viewers to be able to be both representative of the overall opportunity set, be a trackable benchmark, and be able to service

the different opinions that get surfaced in that kind of process. All right. And then kind of our final thoughts here. Nick, I'll go to you for this one first. We are anticipating Anthropic. We are anticipating Open AI to come public at some point down the line here. How much do you think that it will mimic the kind of, I guess, market movement and volatility that we have seen with SpaceX, is it fair for an investor to use what we are seeing so far with SpaceX shares since the IPO is a so-called blueprint for how some of these other mega-cap tech frontier AI companies come to market? Yeah, on that one, how open AI, how anthropic will perform in the short term, I always kind of

say my crystal ball is as cloudy as everybody else is. I think it's going to depend so much situationally on what's happening in the overall market at that point of time. I think SpaceX, obviously there was a ton of investor enthusiasm. You saw that with the significant day one pop that followed on for a few days and now it's been interesting to watch it come back down to Earth, so to speak, in a little bit of a degree. I think there's just so many factors at play on the timing of this. And we've been in right now in the last couple of months, a pretty historic two, three month rally for the equity market. And so I think that was feeding into that when these other mega IPOs eventually come to market the environment might be different. And so it's really hard to

predict how it will be. But again, if we would just go back on base rates and the historical data historically suggestive that day one pops are pretty strong, particularly with some of these stocks that have a pretty good pelt up enthusiasm and demand behind them. So it would not surprise me at all to see a similar dynamic play out with some of these others set to come in the months ahead. And a similar question to you, Arna, with hypothetically, because again, my crystal ball is just about as cloudy as Nix is at this point, hypothetically with Anthropic and Open AI on deck, maybe, so to speak. Do you expect a similar kind of logistical ease or friction with regard to the index level inclusion for those types of names, a la what we've seen with SpaceX? Do you think this is

a blueprint, what SpaceX has done, and the index providers view? of how to execute the index inclusion. Yes. So on my side, I wouldn't want to comment on whether the space six IPO methodology is a blueprint. What I can say is we as index providers have put in place a blueprint that is clearly visible for anyone and can follow, meaning there is a fast track eligibility. If you meet certain thresholds, you're potentially eligible for index inclusion. However, what we did not change was our rules in terms of minimum voting rights,

as well as other minimum standards. So those have to be met if you want to be included in index. If you do meet them in an IPO, you will be included on a float adjusted basis. And sort of that blueprint is for everyone to see out there in the moment. Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. Nick Ryder, the CIO at Kathmir Capital, continues with us now. Nick, it was an interesting discussion that we had with you and with Arna Noak over at Footsie Russell

with regard to just how much SpaceX has kind of impacted things in the marketplace, both from the index provider's perspective, the ETF provider's perspective, and for retail advisors as well. Maybe can you take us through a little bit about just how much there have been, I guess, clamorings for these assets? It feels like the demand is insatiable for investors when it comes to these high-profile IPOs for these big frontier AI companies and SpaceX. What exactly does it mean for an investment advisor when they see the kinds of interest

coming from their clients to get in on the action? Yeah, we alluded to it on the main show. It was illuminating to me we had a lot of, an uptick, I'd say, in inbound requests for allocations to the SpaceX IPO, which was not something, we've gotten it periodically over the years on a one-off basis where one of our clients has a connection or has some insight into a particular company where they want to gain access. We had a handful of our clients reach out to us looking for allocations, and I've had similar conversations with some of my peers in the industry where they've noticed a pretty material uptick in people

asking for allocations. I look at that and say, in some respects, it's emblematic of this environment where large tech companies have been thriving in recent years. They've been the market darlings. It's a little interesting to see the Mag 7, obviously lagging the overall market this year. But generally speaking, there's been a lot of enthusiasm around a number of these companies that are central to the theme, the secular growth theme related to AI. And so it didn't surprise me in any respect to see some of this inbound interest. But I do look at it and say, perhaps the overall environment might be getting a little bit too optimistic and in reminiscent of some ways in the environment you had in the in the 90s into the early 2000s.

You're referring, of course, to the dot-com bubble. You didn't want to say it, but we will say it because that's exactly what it was back then. I guess the next level here is with regard to, you know, the concentration side of things. Over the last 10 years, the history is fairly clear. We've watched this so-called Mag 7 develop into the Mag 7 because many of these mega-cap technology and media-type companies have just seen so much investor interest over the course of the last decade to them propel them to such a hefty weighting in many of these market-cap-weighted indices. We are seeing a similar story play out with regard to these kind of frontier technology-type companies, whether it's space travel with SpaceX or artificial intelligence with the likes of OpenAI.

and anthropic. That has actually, by some people's standards, taken away the luster from that Mag 7 trade because it feels as though people want to move or evolve from Mag 7 into that next leg of kind of technology or being at the tip of the spear with regard to investing. From a concentration risk standpoint, do you feel as though there is a little bit more focus on just a handful of names? It was seven stocks. And now it feels like it's just three or four that may be getting most of the investor attention right now. Yeah, they're certainly gaining more attention in terms of the flow of capital into markets and their price action that relates to it. But the concentration is still very much there when you look at concentration of the 10 largest stocks in the S&P is still 40% or so of the MAG 7.

It's 30 and change percent. We're still very much in this market that remains at a global. level, heavily concentrated all else equal in U.S. mega cap growth slash technology stocks and far less so among old economy or value or small cap relative to where we had been. And so, yes, I think in some respects on the margin, attention is shifting from some of the MagS 7s towards SpaceX, towards anthropic, towards the new object that's coming to market via these IPOs. semiconductors have obviously gained a ton of attention for a variety of reasons which we could get into. And so, yes, I think there's a bit of just a rotation happening within the markets,

but the concentration risk is still very much there in terms of the top heaviness of overall market composition. That really hasn't shifted a whole lot relative to where we were, say, six or seven months ago. That's from the equity index standpoint. Let's talk a little bit about the investor portfolio standpoint, which you have direct purview over, these days we've seen a lot more headlines coming out with regard to the massive amount of debt issuance that's happening with some of these kind of mega-cap technology stocks and frontier AI slash space type companies. Invitya has come to market with a large offering over the course of the last few weeks here. We know that SpaceX had a large offering as well, following up on its big IPO raise of capital. Is there a feeling as though

with investment advisors putting assets in the client portfolios, that this dynamic of these top kind of like 10 different type companies, whether they're private, whether they're public or soon to be public, could present a concentration risk for investor portfolios as well if they start to buy things like, say, SpaceX or Nvidia bonds as well as the stocks as well. Does that kind of play into how an investment advisor needs to treat concentration as well? I think it ought to be considered and it's something we're mindful of. However, you know, the concentration risk is far less significant in investment-grade fixed-income markets than what you see in equity markets to go by those same numbers. Within fixed income, though, diverscation is absolutely paramount,

particularly if you're talking about high-quality investment-grade fixed income, given that right, a bond return is contractual. It's all goes well, I receive my coupon payments and my principal back in maturity and there's no potential for a greater upside beyond that. And so minimizing losses or mitigating the impact of credit losses becomes paramount. And so all else equal, you certainly do want to be more diversified rather than less because you can't have a handful of winners make up for the losses from some of the underperforming. Now, with an investment grade, bonds default risk has historically been pretty negligible. So it's perhaps a little bit less relevant. But it certainly bears monitoring and keeping an eye on, however, I don't worry and think as much, given where the

situation is today, about concentration risk within investment-grade bond indexes or funds than I do necessarily when we think about it. In the potential overexposure, we might have the certain themes in certain sectors, industries within the traditional cap-weight indexing concentration in the current moment. Okay. And then finally, before we let you go, as we talk about the way things are anticipated to play out for OpenAI and Anthropic as they kind of come to market here over the course of who knows how long, but they are certainly highly anticipated and the ones that investors are looking for as being on deck. What exactly are you going to do in terms of maybe the analysis behind those potential IPOs, given what

you've seen play out thus far with SpaceX? Yeah, we talked about this on the manager. It's not changing dramatically for us. We continue to rely more on the meta-analysis and simply say that, yes, IPOs have had, on average, have had great day one pops historically, though, over the next year to three years, they've tended to underperform. On average, again, you have some outsized winners. You have some losers that challenge it with any discretionary portfolio management exercises is how do you ultimately try to discern in advance the future winners from the future losers. We're humble in our ability to do that. And so that's really why we tend to rely on with equity markets, cap-weighted passive as the baseline, and then those systematic tilts towards

those empirically warranted factors, and allow the indexes to shake out as they do. Again, I know there are some criticisms away. Some of the index providers have handled the fast-tracking of SpaceX and potentially then with open-a-anthropic to come. At the end of the day, the Index's job is to represent the market it's covering. Index funds are theoretically supported and empirically validated to be highly effective strategies. And so despite some of these shortcomings on how one might worry about the fast tracking of these mega IPS indexes, they've been a pretty tough benchmark, so to speak, for active managers outperforming. So we're generally reluctant to try to say we're going to have some unique insight into the future prospects for a company like

SpaceX or OpenAI or Anthropic. Notwithstanding, obviously, you know, I do believe all of these are great companies that will go on to do great things. However, we always need to be mindful of. There can be a big disconnect between great company and great investment as the price you pay for that investment certainly matters and heavily influences the long-term return prospects of it. All right. A lot to think about for sure as we kind of wait for what's going to have possibly with Anthropic and OpenAI. Nick Ryder, Chief of Investment Officer over at Kathmir Capital, thank you very much for the conversation.

We appreciate it. And that does it for the ETFH podcast. Thanks for listening. Join us again next week or head over to etfedge.cbc.com. Over the last few decades, technology has transformed our world in amazing ways. Through it all, Invesco QQQQEF has connected investors to the forefront of innovation. Access the future today with an interesting. Investco QQQ. Let's rethink possibility. There are risks when investing in ETFs, including

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