SpaceX Stock Scores a Much-Needed Win After Joining the Russell 1000. Intense Index Concentration Means Retail Investors Are Still the Biggest Losers.

Following its historic IPO, SpaceX (SPCX) has been desperate for any sort of buying pressure that could reverse its 33% dive from $225 to the $150 level. 

It found it last Friday, June 26, when Russell announced that it would add SPCX to the Russell 1000 Index as part of its semi-annual index reconstitution. 

Since market indexes like Russell 1000 are the basis for the majority of ETFs, when a stock like SPCX is freshly added, it forces ETF managers to buy shares.

The S&P 500 Index adding a stock is really big news. The Russell 1000 not so much. But still, it’s a popular benchmark, and given SpaceX’s public float size of $100 billion, ETF managers were required to buy between $3 billion and $4 billion of SPCX stock to match the new index inclusion. 

Above you see the two biggest ETFs tied to the Russell 1000. Note that the Russell 1000 iShares ETF (IWB), the larger of the two, is still only about one-twentieth of the size of the largest ETF tracking the S&P 500. 

There’s no accounting for taste when it comes to stock indexes.

Let’s consider for a moment what this says about the market. Because while SpaceX certainly has a lot going for it as a business, even if it was a total pipe dream but still managed to reach the same valuation, it would still earn its spot in major index ETFs (GameStop (GME), anyone?).

Because we aren’t talking about active portfolio managers doing rigorous fundamental analysis, looking at the charts, or weighing valuation against risk. We are talking about automated, algorithmic, non-discretionary buying. It is all rules-based. As a DIY investor, you need to understand exactly what this means for your capital. It means that at some point, when the tide goes out, the losses could hit investors as strongly as the recent gains did. 

This is artificial, forced demand. It’s intentional. But there was a time when indexed investing accounted for maybe 10% of all equity allocations. Now, it is more than half, and likely on a path toward 70% or higher. That’s great until the market heads south… triggering what is essentially a 21st century bank run.  

IWB’s chart is above. It might as well be a chart of the S&P 500 ($SPX), a 500-stock index where only 50 stocks really matter. 

Here are the largest holdings for IWB, which allocates based on market capitalization. The top 10 names account for 36% of the index. That means 990 stocks make up 64% combined. So their average weighting is about 0.06%. 

In other words, if you invested $10,000 in IWB, each of those 990 stocks would receive just about $6-$7. Still think you have “smart diversification?” 

SPCX’s addition to the Russell 1000 index is a good reason to help investors understand what index ETFs are, what they do well, and what is just perception. When most of the stocks do not move the performance needle, it’s a reminder to stop being complacent about what you own. 

Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob’s written research, check out ETFYourself.com.