* SpaceX IPO presents indexing firms with hard questions

* They can stand by their rules or they can shift to address

market changes

* Investor choices may be made more stark by index decisions

By Suzanne McGee, Lewis Krauskopf and Anirban Sen

NEW YORK, June 15 (Reuters) - Last week's stock market debut

of Elon Musk's SpaceX is forcing providers of equity

indexes to reconcile two often-conflicting objectives: Do they

stick to their inclusion rules or revise them to reflect changes

in the market they are targeting?

Financial advisers and asset managers agree that both goals

can be in the interests of investors - but navigating the

tension between the two requires forethought about the risk

tolerance and appetite for volatility implicit in indexing

decisions that have often been presented as one-size-fits-all.

"The IPO is the headline, but the real story is about index

methodology," said Dina Ting, head of global index portfolio

management at Franklin Templeton. "Investors should pay

attention ... because what you actually own depends on whether

you're buying this index versus that index."

The mega-IPO wave kicked off by SpaceX and expected to continue

this year with AI favorites Anthropic and OpenAI may force

reassessments of which indexes give investors more of the risk

profile they seek, investors and indexers say.

For the time being, decisions at Nasdaq to quickly add

SpaceX to its signature Nasdaq 100 index and at S&P Dow Jones

Indices, which oversees the benchmark S&P 500, to hold off will

likely add to the Nasdaq's reputation as a favorite of those

willing to accept big price swings as part of the tab for

potentially large gains.

"You're going to get very different experiences because all

of the indexes made a bunch of active decisions about which

stocks to include, when to include them, how much weight to give

them," said Joel Schneider, deputy head of portfolio management

at Dimensional Fund Advisors, an investment firm that bills its

approach as "going beyond indexing."

Schneider said the wave of mega IPOs "is causing advisers

and investors to start to pay more attention to some of these

decisions and how they are made and what they mean."

RUSH TO JOIN MAJOR INDEXES

In the months before its listing, SpaceX sought to accelerate

its addition to major indexes including the S&P 500, the

most widely tracked U.S. index, and the Nasdaq 100, long a

showcase for the most powerful U.S. technology firms.

Investors buy mutual funds and ETFs that mimic these indexes

to get broad exposure, such as the Invesco QQQ ETF for

the Nasdaq 100 and the State Street SPDR S&P 500 ETF ( SPY ).

"I think the most aggressive investors have for years been

shifting their focus to the QQQs rather than the SPY. The

decision by the different index providers will further that

trend," said Eric Kuby, chief investment officer at North Star

Investment Management Corp.

In changing its rules to add SpaceX within a month of its

listing, the Nasdaq returns to its roots in promoting

high-flying firms that in some cases have not generated strong

financial results. Were Anthropic and Open AI to also list on

the Nasdaq, it could highlight a valuation disconnect in U.S.

markets last seen in the 2000 technology bust.

MEGA IPOS OFFER GLITZ, RISK

S&P 500 index funds with trillions of dollars in assets

would have been forced to buy up SpaceX shares had ‌rules been

changed to admit it to the index. There are $3.2 trillion of

assets under management in the three largest ETFs tracking the

S&P 500, from Vanguard, Invesco and State Street, compared with

around $600 billion of assets in the largest Nasdaq 100 funds.

The decision by the S&P 500 not to immediately add SpaceX

and similar firms potentially creates a path on which the

returns generated by giant indexes diverge even more than they

have in recent years, creating a dilemma for investors who may

be drawn by the glitz of AI-related offerings but who question

the risk of trillion-dollar-plus IPO valuations.

"In general, if you're sort of more risk-on, if you would,

then obviously the QQQ has the ability to include companies that

are not profitable," said King Lip, chief strategist at

BakerAvenue Wealth Management in San Francisco. "Risk-off

market, you're going to have the S&P probably going to do better

from an overall perspective."

Schneider said research published this month in the scholarly

Review of Asset Pricing Studies shows that fast-tracked IPOs

outperform their non-fast-tracked counterparts by 5 percentage

points through the date of index inclusion - but that the shares

give back more than half of those gains within two weeks.

To be sure, S&P 500-linked funds still have heavy exposure

to technology stocks and to AI-linked trends that have helped

drive markets higher, and also could make them vulnerable in the

eyes of some investors.

"Obviously, the early inclusion of some of these companies into

the indices is a change, so people that have been investing

passively are going to find themselves arguably with riskier

portfolios than they were historically," said short-seller Jim

Chanos, who has warned that the SpaceX offering is fueled by

"hopes and dreams" that do not justify its valuation. "And the

AI bull market - to the extent there's anything systemic, it's

just that equity portfolios have gotten a lot riskier."