Robin Hood and his band of merry men became famous for their guiding principle of stealing from the rich and giving to the poor. A rather noble behaviour. Unfortunately, lately, there are many more examples of the opposite, taking from the poor for the enrichment of the wealthy. Perhaps the timeliest example is SpaceX, which has already gone on a pretty wild ride since IPOing (Initial Public Offering) in early June.
SpaceX IPOed with a really high valuation at about a $1.75 trillion market capitalization. To put this in perspective, all Canadian equities total about $5 trillion. This was the largest IPO in history. After the IPO, shares rocketed higher to breach just over $2.6 trillion and have since come back down to earth with a current value of $1.4 trillion following reporting their first quarter as a public company. Clearly space travel is safer than this IPO.
So, why are we calling this an example of the anti-Robin Hood and not just a rough IPO? It comes down to investor protection. For all IPOs, insiders or pre-existing shareholders often have lengthy lock-up periods after the IPO during which they cannot sell their shares. Sometimes these last quarters or years. SpaceX has what we would call a very aggressive schedule allowing insiders to sell. In fact, just about all insiders, apart from Elon Musk, are free trading by the end of 2026, a mere six months away.
It goes roughly like this for pre-IPO shareholders: 20% release on August 6, two days after their Q2 earnings print. Then 7% every 2-4 weeks until Q3 earnings in October releases the last 28%. Which means we are just entering the start of insiders selling or at least having the ability to sell. Who are the insiders? Alphabet owns a chunk, plus a number of venture capital firms, sovereign wealth funds and employees. For our anti-Robin Hood analogy, these are the rich.
So, who are the poor? Elon Musk certainly has a devoted retail following. Maybe they aren’t “poor”, but it is all relative compared to venture capital firms. But they know what they are doing, it is an active decision to buy. This brings us to the index ETFs, popular and ever-growing investment vehicles that are included in most 401ks or RSPs. These vehicles have grown so much they now have strong systematic effects on prices and the markets.
Many indices altered their inclusion rules to enable them to add SpaceX more quickly after the IPO. It is a fair argument, as many companies are staying private longer and growing to gigantic size before tapping public markets. Nasdaq and FTSE Russell changed their rules, S&P 500 Index Dow Jones didn’t. Perhaps with the S&P 500 outperforming just about every manager, why mess with that process.
This is why we are calling this ‘anti-Robin Hood’. The weighting in these ETFs is typically a modified float, meaning the market cap is meaningless, it is the free-floating capitalization that counts. So, with most shares still held by insiders after the IPO, the index weight of SpaceX was small. But as more shares become unlocked, the weights in index ETF will rise. Or in other words, as more insider shares are unlocked to sell, the ETFs will be automatically buying – anti-Robin Hood.
This is an interesting situation. We have many investors with cost bases extremely low including early VCs. For those with costs in low single digits, they are likely happy sellers regardless of price whether $100, $150 or $200. Meanwhile, ETFs are buying as more shares enter the float, also regardless of price. Let’s say anything can happen. Insiders could wait and see if ETF buying pushes prices higher. There are an estimated 179 ETFs that now own SpaceX. Or the insiders could overwhelm buyers. One thing is certain, given the dynamics and size of this IPO, systematic flows are meaningful and provide lessons with other mega IPOs on the horizon.
Systematic Flows Matter
With more and more dollars invested via index tracking vehicles, systematic flows have become more impactful. Sure, fundamentals still matter a lot, but investors should also be aware of flows. For instance, there was a good amount of weakness in other large holdings of major indices ahead of SpaceX inclusion. The 1% addition of SpaceX in QQQ for example, meant that all other positions were sold down by 1%. Across many other ETFs, this starts to add up.
These systematic flows can also create opportunities as they are temporary in nature. Will we see weakness across other holdings as more SpaceX become free trading or other mega IPOs are added to indices? Perhaps. But we would caution that it is never that easy, mainly because markets are made up of a lot of smart people that are also aware of these nuanced flows. Was the weakness in SpaceX heading into the August 6 unlock of so many shares’ investors front running this event. And now that it has passed, we are seeing SpaceX rebound strongly. Is this the ETF buying bounce that will be met with supply as early investors look to exit?
Final Thoughts
We are neither bearish nor bullish on SpaceX; it is pretty far outside our investment universe. If anything, we are disappointed in index providers changing index inclusion rules, even if we understand the argument to do so. For investors, with estimates of passive indexing making up 54% of the U.S. equity market and 44% globally, understanding flows and what the indices are doing is perhaps just as important as fundamentals, economic data or what the Fed might do next.
— Craig Basinger at Purpose Investments.
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