SpaceX Is Landing Inside ETFs. Some Might Surprise You

Much like Fleetwood Mac, SpaceX … wants to be with you everywhere.

Since its explosive initial public offering in June, issuers and index providers have rushed to incorporate the aerospace and satellite communications company into their products. So far, it appears in 179 exchange-traded funds, according to a recent Morningstar analysis, including both your traditional broad market index funds and some thematics as well. But as more shares of the company become available, its weight could become oversized in some indexes and the products that track them, said Zachary Evens, a passive strategies analyst at Morningstar.

“That will be an important story going forward over this next year, as more shares get unlocked, as SpaceX crosses several milestones,” Evens said. “A: How many shares will become available; and B: What does that increase in float do to … its position in these benchmarks?”

Value Prop

One surprising finding from the Morningstar report is that SpaceX has already made its way into several value ETFs, specifically value index funds, he said. In other words, the company is being added to funds that hold stocks considered undervalued, despite the company’s sky-high market cap and reports of it even being overvalued. The reason behind its inclusion in these funds is that the products have rules in place to determine what is considered a value or a growth ETF. One metric some value funds take into account is price-to-earnings ratio, and because SpaceX’s PE ratio is currently negative, it can be considered a value company, he added.

“[SpaceX] found its way into SCHV, the Schwab ETF, which uses price-to-earnings as one of its criteria when deciding if a stock fits in the value or growth bucket,” Evens said. “The unusual cases test those rules, and that’s what happened here with SpaceX having a very negative price-to-earnings ratio.”

According to Morningstar data, some value funds that hold SpaceX include:

• The Schwab US Large-Cap Value ETF (SCHV), which has $15 billion in AUM, has a 0.27% allocation to the company.
• The iShares Russell 1000 Value ETF (IWD), which oversees $81 billion and allocates 0.02% to SpaceX.
• The Vanguard Russell 1000 Value ETF (VONV), which has an AUM of $21 billion and gives SpaceX a 0.02% weighting.

Space From the X? Should value fund investors be worried about SpaceX’s presence in value products? Probably not, Evens said, because right now, it claims a very small part in all of those strategies. But, it does highlight the need for investors to be aware of the rules that underpin these indexes because it can lead to different portfolio outcomes than expected, he added.

“Investors might think that the Russell 1000 index is pretty similar to the S&P 500 index, and that is generally true, but there are some important distinctions between those indexes, and unique cases, like SpaceX, test some of these index rules,” Evens said. “I think awareness of the underlying index rules is the most important takeaway for investors.”