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The Faulty Logic Behind the SpaceX Index Trade
There are lots of reasons people bought SpaceX’s SPCX 19.22%increase; up pointing triangle $1.8 trillion IPO, including faith in Elon Musk, hopes for the first-day pop and, perhaps, a belief that it will one day profit from colonizing Mars. One idea that’s popular even with those who think the stock is wildly overvalued is that early entry into the Nasdaq-100 and several other large indexes is virtually a guarantee of free money.
The trade works like this: When SpaceX joins an index, funds tracking the index have to buy no matter the price. So if you buy in advance, you can then sell to the index fund at a higher price when it joins, which will be on Friday for some of the indexes. The demand part of the logic is impeccable, and index arbitragers have long done exactly this, albeit with risks that make it far from guaranteed money.
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