Regulators Bar Passive ETFs From SpaceX IPO as Active Funds Target 25% Stake

South Korea’s asset-management industry is splitting over SpaceX’s planned listing after financial regulators effectively blocked passive exchange-traded funds from participating in the initial public offering. The guidance allows active ETFs to buy shares at the offering stage and seek to benefit from any early gains after the stock starts trading, while passive funds will have to wait until after the listing.

On June 9, investment-industry officials said South Korea’s financial authorities recently told asset managers, during a regulatory interpretation process they had requested, that passive ETFs would face difficulty participating in the SpaceX IPO. The authorities appear to have taken the view that buying IPO shares before the stock is added to an index could create tracking error for index-following products.

Korea Investment Trust Management is the only firm that has officially disclosed plans to participate in the SpaceX IPO. The company plans to receive an institutional allocation and add the shares to products including the ACE US Space Tech Active ETF. Because it uses an active strategy, the fund manager has relatively broad discretion to add or remove holdings compared with a passive ETF. The size of the IPO allocation has yet to be decided. Korea Investment Trust Management plans to apply for the maximum possible subscription and then buy additional shares in the market, if needed, to raise SpaceX to as much as 25% of the portfolio.

Most competing space and aerospace ETFs run by Samsung Asset Management, Mirae Asset Global Investments and Shinhan Asset Management are passive products. Those ETFs are designed so that SpaceX can be added to their indexes on an ad hoc basis within one to two business days of the listing, with a weighting of as much as 25%.

Industry officials say the regulator’s stance, which allows only active ETFs to buy IPO shares, puts passive ETFs at a disadvantage. IPO stocks often jump sharply above the offering price on their first trading day. In a jumbo deal such as SpaceX, whose valuation is estimated at about $2 trillion, returns immediately after the listing could have a meaningful impact on ETF performance.

The stance has also drawn complaints from some in the asset-management industry. Their argument is that because SpaceX is set to be added to indexes immediately after listing, allowing passive ETFs to buy at the IPO stage would have little effect on the market. “Even if passive ETFs participate in the IPO, the resulting tracking error would effectively last only about a day,” one industry official said. “It could actually help reduce market impact from large-scale buying immediately after the listing.” Others are taking a more cautious view. Another industry official said there is no guarantee IPO participation would lead to excess returns, given the stock is expected to be volatile after the listing.

Meanwhile, expectations for a SpaceX listing are pulling retail money into US space and aerospace-themed ETFs. Over the past month, individual investors were net buyers of 1.4614 trillion won ($1.06 billion) of the TIGER US Space Tech ETF. Over the same period, the KODEX US Space Aerospace ETF saw net inflows of 124.2 billion won ($90.1 million), the ACE US Space Tech Active ETF drew 59.4 billion won ($43.1 million), and the SOL US Space Aerospace TOP10 ETF attracted 49.2 billion won ($35.7 million).

Yang Ji-yoon, Hankyung.com reporter yang@hankyung.com