Should You Buy SpaceX?

Most pre-retirees choose the S&P 500 because they believe it’s a safe, hands-off, and purely mechanical way to grow their wealth. They assume it simply holds the 500 largest and most stable companies in America.

But that is a misconception.

The S&P 500 isn't entirely passive; it is governed by an active committee that enforces specific guardrails. However, S&P is currently proposing massive structural changes to how companies enter the index—and it could quietly inject unprecedented risk into your retirement portfolio.

With massive, highly hyped companies like SpaceX, Open AI and Anthropic continually dominating headlines and moving closer to potential public markets, the race is on for index providers to capture the hype. Here is a look at what is changing behind the scenes, why index providers are rushing to create a "SpaceX loophole," and how a factor-investing approach offers a scientifically proven alternative.

The S&P 500 Profitability Rule: A Guardrail Under Threat

Historically, to earn a coveted spot in the S&P 500, a company had to pass a strict profitability test and wait at least one year post-IPO. This guardrail ensured that a business could actually make money before being added to the retirement portfolios of millions of everyday investors. Because of these strict criteria, there are actually more than 50 smaller, profitable companies included in the index instead of larger, unprofitable ones.

Now, S&P is proposing to alter those rules completely.

Under the new proposal, S&P would drop the profitability requirement entirely for the top 100 stocks and fast-track new IPOs into the index after just six months. Other major indexes, like the Nasdaq 100, already allow massive initial public offerings (IPOs) to join in as little as 15 days.

The Real Reason Behind the Change: Index Licensing Fees

Why the sudden rush to abandon time-tested financial guardrails? It boils down to Wall Street competition.

Index providers are in a lucrative business. According to Morningstar, index providers generated over $9 trillion from licensing fees in 2024 alone. When investors demand the latest hot stock, index providers want to ensure their index is the one people buy. Unfortunately, chasing investor enthusiasm in this manner heavily mirrors the late-1990s environment that directly caused the devastating Dot-com crash.

The SpaceX Factor: The Hidden Cost of "Forced Buying"

To understand how this impact trickles down to your retirement savings, consider a highly anticipated future market entrant like SpaceX.

If a massive, hyped company like SpaceX goes public or qualifies under these newly relaxed index rules, the S&P 500 committee can fast-track it into the index almost instantly. When that happens, every single standard S&P 500 index fund and ETF in the world is legally required to purchase millions of shares immediately.

This creates a dangerous phenomenon known as forced buying:

• Buying at the Peak: Mega-IPOs naturally launch with massive media coverage and peak investor enthusiasm, meaning their initial price often reflects hype rather than true fundamental value.

• Artificially Inflating Prices: When billions of dollars from index funds are forced to buy into a stock all at once, that sudden artificial demand drives the stock price even higher—after it has already run up.

• The Valuation Trap: Academic research shows that newly public companies historically underperform the broader market during their early years due to unproven business models at scale and insider selling.

We previously saw a version of this play out with Tesla. The S&P committee did not add Tesla to the index until 2020—a full 10 years after its IPO and after it had skyrocketed 18,000% from its initial price. Now, index committees are motivated by licensing fees to ensure they don't miss the next SpaceX—meaning you, the investor, bear the risk of buying into unproven, highly volatile stocks at the absolute peak of market excitement.

Evidence vs. Hype: The Ark Royal Alternative

If you are within a few years of retirement, a sudden influx of highly volatile, fast-tracked mega-stocks into your "passive" index funds can drastically alter your portfolio's risk profile without your knowledge.

At Ark Royal Wealth Management, we believe your financial future is too important to leave to an index committee focused on maximizing corporate licensing fees. That is why we utilize Dimensional Fund Advisors (DFA) as a core component of our client portfolios.

Instead of guessing which hot stock will win the market lottery, DFA relies on decades of peer-reviewed, academic financial science to capture the true drivers of long-term returns:

Rather than chasing momentum, a factor-based approach leans into three time-tested growth engines: the broader market premium, the size premium (smaller companies with room to grow), and the value premium (undervalued companies with strong fundamentals).

Notice what is missing from that list: media hype, popularity, and recent short-term performance.

Take Control of Your Retirement Portfolio

All investing involves decisions. The real question you must ask yourself as you approach retirement is whether you want your life savings driven by evidence or by hype.

If you are approaching retirement and want a professional second opinion on how your portfolio is structured—and whether your current "passive" index funds are exposing you to hidden risks—Ark Royal is here to help.

Ready to build an evidence-based retirement strategy? Click on See If We're a Fit to schedule a complimentary consultation call with our team today.