What SpaceX teaches investors about index investing, asset flows
The reality of new index rules
Basinger acknowledges that the inclusion of SpaceX on the Nasdaq 100 far sooner than old rules would have allowed isn’t purely a product of regulatory capture. The fact that companies stay private for longer and can access huge amounts of capital from private investors makes late-stage IPOs far more likely to occur in future. When those companies IPO at valuations in the trillions, they become hard to ignore for index providers. At the same time, however, he notes that the S&P 500 rejected the idea of including SpaceX, perhaps because the index has consistently outperformed active managers over the past 20 years using its existing rules.
Basinger says he didn’t write this paper to prompt calls for social justice. Instead, he says the way that money flows through index exposures to certain companies can prove instructive for investors. There are risks that come when a cohort of private investors and shareholders are given sudden access to liquidity after five or ten years locked up in an investment. Just as there are dynamics introduced when money flows into new or different asset classes or geographies. Basinger highlights the performance of Canadian markets recently as powered by global capital flows seeking returns from sectors and geographies distinct from the tech-dominated US market.
Even if SpaceX now only constitutes little more than 1 per cent of the Nasdaq 100, its inclusion also points to another key narrative surrounding index investing now: concentration risk. Key US indexes like the S&P 500 are becoming highly concentrated in mega-cap technology names, often tied to the AI theme. Basinger acknowledges, however, that there are no risk controls in an index and there is nothing inherently wrong with a major index becoming highly concentrated. The mistakes occur when investors believe that what they own is more diversified than it is.
“Sometimes those indices will be very skewed in certain areas and lacking in others. And then it’s the job of the advisor or portfolio manager to make sure that if they’re using these tools, that they are knowledgeable about the exposures and/or the concentration they’re taking,” Basinger says.
Finding opportunities and communicating flows
For Basinger, as important as flows are to understand, he believes advisors don’t want to be too opportunistic and chase trends. Instead, he sees flows as a potential indicator of where certain themes or narratives are becoming overbought. He offers the example of the so-called “SaaSpocalypse” which posited that AI was going to destroy software businesses with subscription models. The result was a huge buying opportunity in software names, many of whom have since recovered from their lows. Those mispricing opportunities can be areas where an advisor can add value.
