GoKawiilis a reporter who writes about tech, money, and human behavior. She joined The Verge in 2014 as science editor. Previously, she was a reporter at Bloomberg.
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Index funds are touted as one of the safest ways to invest. Rather than picking and choosing individual stocks, index funds let you bet on the market as a whole. So what happens when a company like SpaceX — a giant gamble, and, in my opinion, terribly overpriced — is fast-tracked into the Nasdaq-100? Does it suddenly threaten the stability of index funds based on the Nasdaq-100? Can a $1.77 trillion IPO crater the retirement funds of regular people who would ordinarily have no interest in investing in Elon Musk’s meme stock?
The answer has less to do with SpaceX and more to do with index funds — how they work, their history, and why they’ve been treated as one of the least risky ways to interact with the stock market. So I talked to Burton Malkiel, one of the people most responsible for the rise of the index fund.
“If I were buying individual stocks, I would think twice about buying SpaceX, which is tremendously overhyped,” he tells me. But SpaceX isn’t a reason to avoid index funds, he says. To explain why, here’s a dive into index funds, how SpaceX interacts with them, and how it all might play out.
What is an index fund?
An index fund is an investment vehicle that seeks to match a specific market benchmark, such as the S&P 500 or the Nasdaq-100. It was popularized in part by Malkiel’s 1973 book A Random Walk Down Wall Street. The “random walk” of the book’s title means that the past prices of a stock don’t predict the future, and because it is hard to predict the future, it is very difficult to beat the overall market returns over a long period of time. For that reason, most of us might as well just invest in the overall market and trust it will increase in value as a whole. “A very small minority of stocks are responsible for the whole return, and experts can’t pick them any better than the index as a whole,” Malkiel told me.
The strategy of index fund investment has been endorsed by Warren Buffett, who has suggested that the average investor is best served by putting 90 percent of their money in “a very low-cost S&P 500 index fund.”
And they are very popular! In 2024, the assets under management in passive investing, such as index funds, outpaced that of active funds, according to Elise Ryan of State Street Investment Management.
Why are people worried about SpaceX specifically?
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