By Suzanne McGee
PROVIDENCE, Rhode Island, April 20 (Reuters) - Investment research and analysis provider Morningstar Inc. is the latest index provider to consider revising its approach to designing its market indexes in light of SpaceX's outsize pending initial public offering.
Elon Musk's space transportation and exploration business is on track to issue as much as $75 billion of stock in an initial public offering that could value the company at $1.75 trillion, making it by far the largest IPO ever
recorded and raising unprecedented challenges for investors about how and whether to add it to their portfolios.
Morningstar, eyeing not only the pending SpaceX launch but also other similarly mammoth deals from companies like Anthropic and OpenAI later this year, said it will introduce what it refers to as an alternative way to gauge liquidity of these "unicorns" immediately following their debuts. This would address what is known as the free float requirement, or the requirement that a new public company have a minimum number of shares publicly available for trading.
Morningstar said its CRSP Market Indexes will "undergo enhancements to introduce an alternative liquidity screen", making it possible to add SpaceX and other giant IPOs to these benchmarks more rapidly. The funds that use the CRSP indexes as a portfolio benchmark include Vanguard's $607 billion Total Stock Market ETF.
"Index providers must evolve eligibility rules to keep their benchmarks relevant to new market realities," a company spokesman said in an e-mail to Reuters.
Morningstar is the latest firm to wrestle with how to deal with this year's crop of pending IPOs from market giants like SpaceX. Current guidelines were established when U.S. IPOs tended to be of smaller companies, often still unprofitable, with limited track records and revenue. Companies like SpaceX, however, are waiting until they are older or much larger to go public, and index and exchange executives say that requires a new approach on their part.
Nasdaq plans to alter the rules governing the makeup of its Nasdaq-100 Index to allow companies meeting certain criteria to be added to the mix in a fast-track process. That would cut any delay in adding newly listed companies from several months to only 15 days, Nasdaq told Reuters.
Separately, S&P Dow Jones Global Indices is contemplating adjusting its own rules regarding the Standard & Poor's 500-stock index and other products, according to a report from Bloomberg in mid-March. The current S&P rules require 10% of a company's stock to trade freely. A spokesperson for S&P Dow Jones Global Indices declined further comment.
Not all investors welcome these moves, however.
"The fact that some of these indexes may be lowering their standards in order to include exposure to the explosion of big growth IPOs that nobody wants to miss out on owning, is concerning," said Mark Malek, chief investment officer at Siebert Financial.
"Size isn't everything. I look to these index providers to make sure that the stocks they include meet some kind of standard, and I'm not sure that some of the proposed changes will allow for that."
(Reporting by Suzanne McGee in Providence, Rhode Island; Editing by Daniel Wallis)
