Index funds are the bedrock of modern retirement. They’re boring. They’re safe. You buy the whole haystack instead of hunting for that one needle. Or so we’ve been told for decades.
Enter SpaceX.
Elon Musk’s rocket company just got fast-tracked into the Nasdaq-1900. The valuation? Around $1.77 trillion. The IPO sold less than 5% of the company. And now, the machinery of passive investing has to buy it whether it likes it or not.
Is this a structural flaw in the system? Does a “terribly overpriced” meme stock threaten the stability of your 401(k)?
To find out, I talked to Burton Malkiel. The guy. The author of A Random Walk Down Wall Street. The man who basically invented the philosophy behind why you don’t pick individual stocks. His verdict?
“If I were buying individual stocks, I would think twice about buying SpaceX, which is tremendously overhyped.”
But that doesn’t mean you should ditch your index fund.
Here’s what actually happens when a monopoly-like space empire enters the passive investment pipeline.
What exactly is an index fund?
Let’s strip the jargon. An index fund is an investment vehicle designed to copy a benchmark. You want the S&P 500? You buy a fund that holds those 500 companies. You want the Nasdaq-100? You buy those 100 tech-heavy giants.
Malkiel’s core argument, dating back to his 1973 book, is that markets are efficient enough that trying to beat them is a fool’s errand. Past prices don’t predict the future. It’s a “random walk.”
Trying to pick winning stocks is like trying to predict the wind by watching the leaves. You might get lucky once. Over the long haul? You’ll lose.
“A very small minority of stocks are responsible for the whole return, and experts can’t pick them any better than the index as a whole,” Malkiel explained.
This logic has won. In 2024, passive investing assets outpaced active management for the first time. Warren Buffett puts 90% of his personal fortune into low-cost S&P 500 funds. Everyone else is supposed to do the same.
So, why is everyone losing their minds over SpaceX?
Why is SpaceX in the Nasdaq-100 specifically?
It’s not an accident. It’s regulatory arbitrage.
Shorty before SpaceX went public, Nasdaq tweaked the rules for its flagship index. Previously, new listings had to sit in limbo, building a track record, before joining the major indices. Not anymore. If a new company is big enough, it can join the Nasdaq-100 on its 15th day of trading.
SpaceX requested this change. Reuters confirmed it.
When SpaceX joined the index on July 7th, passive funds were forced to buy.
The stock dropped at the close of trading on July 6th. Why? Because smart money saw the mechanics. Hedge funds knew index funds had to buy. They front-ran the rebalancing. Finance is messy. It’s full of monsters and arbitrage opportunities.
Research from Harvard Business School suggests this forced buying is a huge reason SpaceX had such a violent IPO pop. It wasn’t organic demand. It was structural necessity.
And SpaceX is just the tip of the spear. Anthropic and OpenAI are coming next. All of them are fast-tracked. All of them will force passive funds to buy into AI concentration whether you want them there or not.
What does this inclusion mean for the stock price?
Chaos. Then stability. Then more chaos.
New IPOs are rollercoasters. Facebook (Meta) dropped 25% the Monday after its 2009 IPO. Trades were halted. Breakers tripped.
SpaceX won’t crash to zero, but it has volatility baked into it. The index inclusion provides a floor.
Here’s the kicker: Employees and early investors are locked out of selling for 180 days. That’s the standard “lockup period.” When those restrictions lift, there’s a flood of supply coming onto the market.
“Index funds are likely to ‘help absorb some of the selling,’ thus keeping the price from dipping too high,” according to The Wall Street Journal.
Without those passive buyers, the price would crater under the weight of insiders cashing out. With them? The price gets propped up by algorithmic mandates.
But remember, more shares are entering the pool in mid-August when Q2 financials hit. This makes SpaceX heavier in the index. If the price doesn’t go up to match the increased share count, the percentage weight shifts. It’s a geometric game that confuses everyone who isn’t a quant.
Why are investors mad about corporate governance?
You don’t vote for corporate governance in your index fund. Your fund manager does. Vanguard, BlackRock, State Street. They cast the votes for millions of individual accounts.
And they are furious.
The CalPERS board (California’s public employee retirement system), along with the New York City and state comptrollers, sent a nasty letter to SpaceX. They objected to the “novel and extreme governance structure.”
Let’s translate that.
Elon Musk owns the voting rights. He decides everything. Shareholders in traditional companies can sue for bad behavior. They can propose bylaws changes. They can vote out board members.
In SpaceX? None of that exists.
Shareholders have limited litigation rights. They are along for the ride. If Musk does something erratic, the market punishes Tesla. But for SpaceX? You’re stuck holding the bag until you can sell the stock. And you can’t sell it easily if you’re in an index fund.
Does corporate governance matter to you? Not directly. You’re a passive investor. But if the big indexers aren’t using their voting power to demand accountability, then the system is broken. Some analysts have even called index funds “worse than Marxism” from capitalist critics who believe they distort markets by making big companies even bigger without consequence.
But still. If you want someone to watch the bosses for you, you need them to have a voice.
Is this an AI bubble?
Yes. Probably.
Before SpaceX, the Nasdaq-100 was already saturated with AI plays. Nvidia. Apple. Microsoft. Amazon. Google. Meta. Broadcom.
The top 10 companies now make up more than 30% of the index. Concentration is at historic highs.
Malkiel doesn’t care. He says this happens every time there’s a technological shift. Railroads were the “dot-com” of the 1800s. The internet in the 1990s was the biggest bubble in history. We overhyped it. We were right to be scared. But if you held through the crash, you made money.
“We’ve overhyped every technological change in history,” Malkiel says.
The market concentrates on a few winners. That’s the game. 4% of stocks provide almost all the returns. The other 96% drag you down. Index funds let you capture that 4% without having to identify which ones they are beforehand. Experts can’t do it. You can’t do it.
So worry less about the AI bubble and more about your own ability to identify it.
Can you avoid owning SpaceX in your portfolio?
Yes, but it costs you.
If you want to keep Musk’s space monopoly out of your retirement, you have two options.
First, buy S&P 500 index funds instead of Nasdaq-100 funds. SpaceX is not in the S&P 500. It has its own governance hurdles and doesn’t meet the strict requirements of that specific benchmark. This is the easiest path.
Second, buy ESG funds (Environmental, Social, Governance). These funds screen out companies based on ethical criteria. SpaceX fails the “G” (Governance) test miserably. It might also fail the “E” (Environment) due to rocket emissions.
But there’s a trap.
ESG funds often have higher fees. And they often underperform broad market indices. Worse, they might still hold Tesla. Musk’s electric car company has a better governance structure (shareholders can vote), but the CEO is still Musk. If your issue is specifically avoiding SpaceX, you might end up owning his other company instead.
“Someone trying to avoid SpaceX because of Musk might end up with Tesla in their ESG fund,” Malkiel notes.
The bottom line
SpaceX is in your index fund because of rules, not because of merit. It’s a structural inevitability, not a market vote.
Should you panic? No. The market is resilient. The fund rebalances. If SpaceX drops, the index shrinks its weight in that fund automatically. You’re protected from total ruin.
But should you buy SpaceX stock directly?
“If I were buying individual stocks, I would think twice about buying SpaceX,” Malkiel warns.
The risk is asymmetrical. You’re betting on a monopoly with a temperamental owner, against a backdrop of overhyped valuation.
The smart money? Stick to the index. Let the algorithms absorb the shock. Let the index funds handle the volatility.
You don’t need to like SpaceX. You just need to survive the ride.
And the ride is just starting.
