We Need to Talk About the SpaceX (SPCX) IPO and Single-Stock ETFs

By now, I'm sure you're already sick of hearing about the SpaceX IPO. The company is scheduled to debut on the NASDAQ on June 12 under the ticker SPCX, and it has attracted no shortage of controversy.

Not least because investors are being asked to pay what many would consider a ridiculous premium for a company that is already one of the most highly valued private businesses in history. Sure, SpaceX has revolutionary technology. Reusable rockets, Starlink, launch dominance, Mars ambitions, datacenters in space. Nobody is disputing that.

But investors have heard similar arguments before. During the dot-com bubble, many genuinely transformative companies came public at valuations that assumed decades of flawless execution. While the internet ultimately changed the world, paying excessive prices often led to poor short-term returns.

Most of the controversy so far has centered around index providers bending over backwards to accommodate SpaceX. Normally, major benchmarks require a newly public company to satisfy seasoning requirements before becoming eligible for inclusion. These rules often require a minimum trading history, liquidity thresholds, profitability metrics, or a waiting period that allows markets to properly discover a company's value before passive index-tracking funds are forced to be buyers.

Some index providers, however, appear willing to relax those standards in order to fast-track SpaceX into their benchmarks. Depending on what your 401(k) is invested in, you could end up owning SpaceX much sooner than traditional index construction rules would have allowed.

That isn't my concern today. My view on the index provider issue is fairly simple: these firms are profit-maximizing businesses. If investors demand SpaceX exposure, the incentives to accommodate that demand are obvious. This is just how capitalism works.

What concerns me more is the growing army of ETF issuers rushing to launch SpaceX-linked single-stock ETFs. You know the ones: 2x leveraged SpaceX; 2x inverse SpaceX. Maybe a covered call version shortly afterward targeting a double-digit yield and distributing mostly return of capital.

The usual suspects have already begun filing products that appear timed to launch on or around the IPO date. And while I'm generally pretty laissez-faire when it comes to financial engineering, I do think there is a broader issue worth discussing: swap counterparty crowding.

Because at some point, you have to ask yourself a simple question: how many single-stock ETFs can the market actually handle? That’s what I’m personally starting to worry more and more about.

A Quick Refresher on How Single-Stock ETFs Work

Contrary to what some investors assume, most single-stock leveraged ETFs do not actually hold large positions in the underlying stock. Instead, they typically gain exposure through a derivative known as a total return swap.

The ETF posts collateral, usually cash or money market securities, and enters into an agreement with a counterparty, typically a large investment bank. In exchange for a financing cost and spread, the counterparty agrees to deliver the performance of the reference security.

For example, if a 2x leveraged SpaceX ETF wants exposure, it may enter into swaps with one or more banks that provide that return stream. The ETF gets its leverage, the bank gets compensated, the investors make their trade, everyone goes home happy.

These products also generally work exactly as advertised. When I've looked at the performance of many single-stock ETFs, the daily tracking is usually quite good. My concern isn't whether they function properly. My concern is what happens when hundreds of them all rely on the same infrastructure.

Because swap counterparties are not infinite. In practice, you tend to see the same names repeatedly: JPMorgan, Goldman Sachs, BNP Paribas, Société Générale, Morgan Stanley, Citigroup, UBS, Bank of America, and a handful of other globally systemically important banks.

Again, I don't think these products are inherently dangerous. If they didn't exist, many retail investors would simply replicate the exposure using margin loans or short-dated options. People are going to speculate regardless. My concern is less about investor behavior and more about systemic plumbing.

Swap Counterparty Crowding

We now have hundreds of single-stock ETFs. Search for a stock like Strategy (MSTR) in many brokerage platforms and you'll find what feels like an endless wall of leveraged, inverse, and options-enhanced ETF wrappers built around the exact same underlying company with hefty fees.

I have a theory, and to be clear, it is only a theory. I think there is a possibility that hidden systemic risk is building within the increasingly concentrated network of swap counterparties supporting these products. In that respect, SpaceX may end up becoming a useful stress test.

Not because SpaceX itself is uniquely dangerous, but because it is likely to generate extraordinary trading volumes and volatility. Imagine a scenario where dozens of leveraged and inverse ETFs all launch referencing the same underlying stock on the day of its IPO.

Now imagine SpaceX experiences an extreme intra-day move, either higher or lower. The ETFs themselves will need to rebalance, the counterparties will need to hedge, collateral requirements will change, risk models will update. All of that activity ultimately flows through a relatively small number of dealer banks and central clearing systems.

Under normal circumstances, that is manageable. But crowded trades have a habit of becoming crowded risks. If enough participants are concentrated in the same trades and using the same dealers, market liquidity can deteriorate very quickly during periods of stress.

I'm probably being Chicken Little here, running around claiming the sky is falling when it isn't. And to be fair, overall single-stock ETFs remain a small fraction of total ETF industry assets, at least for now. This is still a niche corner of the market compared to the trillions sitting in broad index funds.

There are also significant mitigations for such a scenario in place right now. Banks monitor counterparty exposures constantly, collateral requirements are updated daily, clearing houses perform stress testing, and risk models estimate default probabilities and potential exposure levels.

The safeguards are extensive, and frankly, they were probably sufficient for what we had before the single-stock ETF boom. But that does not mean the discussion should end there, and the trillion-dollar SpaceX IPO and the ensuring flood of linked ETFs will take us into new territory.

Why I Think This Is a Tail Risk Worth Monitoring

One of the recurring lessons throughout financial history is that risks often look manageable until an unexpected event reveals a hidden concentration. Too many participants relying on the same assumptions holding and the same counterparties delivering.

Maybe nothing happens. In fact, I think that is probably the most likely outcome. SpaceX trades normally (or as normal as a volatile hot stock can), the leveraged and inverse single ETFs gather assets, everyone makes money and moves on to the next hot IPO with a new slew of filings.

But I still think this is worth talking about, because I have not seen many people within the ETF industry talk about the possibility of swap counterparty crowding becoming a future issue. Sure, I've had private conversations about it with notables in the industry. Yet publicly, the discussion is almost nonexistent.

The way I think about it is like noticing a weird mole on your body. Do you ignore it and head out for a day of tanning without sunscreen? Probably not. You take a photo and compare it against the ABCDE warning signs that dermatologists use for potentially malignant moles: asymmetry, border irregularity, color variation, diameter, and evolution. Then you set a reminder to keep an eye on it and follow up if it starts changing. Most of the time it's nothing, but occasionally it isn't.

In many ways, that's how I view the current state of single-stock ETFs. Right now, they may simply be a harmless mole on the financial system. A quirky byproduct of investor demand and financial engineering. But they could also be an early sign of a concentration risk that only becomes obvious in hindsight.

Therefore, I’d rather have the conversation before a problem emerges than after. At a minimum, I want it on the record. Because it sometimes feels like we've become a little too comfortable with risk. A new product launches, the disclosure documents acknowledge the risks, everyone nods and then we immediately move on to the next ticker.

Sometimes that is fine, sometimes it isn't. The SpaceX IPO probably won't break the ETF ecosystem. But the growing web of leveraged and inverse, swap-based, single-stock ETFs attached to it is one of those things I think is worth keeping an eye on.