The initial public offering of SpaceX and the fast-tracking of the company into several major indexes, as well as the anticipated IPOs of artificial intelligence labs Anthropic and OpenAI, have implications for the biggest equity benchmarks and how institutional investors utilize them.
Concentration in U.S. mega-cap technology companies has been growing for years, with the so-called Magnificent 7 companies dominant since at least 2023. The June 29 move of Google parent Alphabet into the Dow Jones Industrial Average, replacing Verizon Communications, will add to the technology focus of that index as well, reflecting the sector’s growing influence on the U.S. economy.
Adding Alphabet will “broaden and strengthen the DJIA’s exposure” to areas including AI, cloud computing, healthcare, technology and digital advertising, S&P Dow Jones Indices stated.
Several asset managers suggest that actively managed equities can be a solution to the increasing index concentration these IPOs will cause.
Speeding up the Process
Several index providers provided SpaceX fast-track entry into their respective indexes—the FTSE Russell said it would allow the company to enter its benchmark indexes after five trading days. Nasdaq required 15 trading days before it will add SpaceX to its Nasdaq 100—much shorter than the year-long process it would normally take. The company went public on June 12.
“You’re likely to see this dispersion across indexes, which I think for many asset owners, they’re looking at that and going wow, it really does matter which index I choose,” says Adam Farstrup, Schroders’ head of multi-asset for the Americas. “Maybe an active manager who has fiduciary responsibility to me … maybe that’s the place I want to be right now.”
While not all index providers are giving SpaceX easy access to their benchmarks—S&P Dow Jones will not include SpaceX into the S&P 500 until the company meets its standard 12-month waiting period for inclusion—some managers note that the discrepancy among indexes puts a spotlight on the fact that passive investing involves active decisions.
Still, the portion of SpaceX shares that are currently floating is very small—roughly 4% of shares are publicly traded, with much of the privately owned remainder subject to lockup periods.
“It’s really hard for investors to pretend that indexing is passive,” says Joel Schneider, deputy head of portfolio management for North America at Dimensional Fund Advisors. “What this set of mega-cap IPOs does is it puts a huge spotlight on the fact that there are human beings at these different index providers who are making different, often subjective, decisions about when and how and at what price and weight and timing to include these stocks.”
Farstrup adds that one client said, “we used to actively choose to go passive, and now we’re passively choosing to go active.” The automatic inclusion of SpaceX in several benchmarks means billions of dollars of passive investors’ money will chase the small number of public shares, presumably driving the price up, raising the company’s valuation.
Sector Concentration Risk
Research published by MSCI in April found that equity markets are more concentrated than at any point over the past 50 years. A growing share of risk is being driven by a small set of U.S.-based technology and artificial intelligence sector companies.
“The top 10 constituents of the MSCI World Index make up more than a quarter of its total weight—a fourfold increase in 15 years,” the research summary stated. “The U.S. now represents over 70% of the index, while information technology alone accounts for more than a quarter.”
Utilizing active—and even high-conviction—managers that proactively chose concentrated portfolios, can help investors proactively avoid allocations to certain stocks, sectors and geographies.
Allocators can align active mandate benchmarks to a manager’s remit, leaving room to tailor concentration guardrails within that scope, MSCI noted.
According to Schroders’ global investors insight survey, released this month, 82% of surveyed North American asset allocators said active management can help achieve their investment objectives over the next 12 to 18 months. Approximately 39% of those surveyed said they are increasing their active mandates specifically to reduce concentration risk in their portfolios—the most frequently cited concern among these investors.
“It’s challenging to look at a passive benchmark increasingly concentrated in one mega-trend or theme and believe that you, as an investor, are capturing the entire universe of investment opportunities,” says Shannon Saccocia, CIO for wealth at Neuberger. “The way we are approaching the active versus passive argument with investors is to say, ‘OK, there is kind of a risk in the concentration. Even if you believe AI will be yielding longer-term success and strong results, there still is this risk. But there’s also an opportunity that you are likely underexposed to other parts of … the next group of winners, even along this particular frontier.’”
She adds that many opportunities in AI adjacencies are being crowded out of indexes by the largest companies. Still, some investors have expressed concern that this set of IPOs mark the late cycle of the equity bull market.
“I think, in some sense, it’s just another stock that comes into the index, and when you think about where the risks are, it’s less about SpaceX in particular,” Farstrup says. “I think the concern we hear from clients much more is: Is this a sign that we are getting to the late cycle in the equity markets?”
Tags: active equities, active vs. passive, concentration of risk, initial public offering, IPO, SpaceX