SpaceX and OpenAI: The Mega IPO Grift

Some massive companies are set to go public very soon. Private companies like SpaceX, OpenAI and Anthropic would rank among the largest companies if they went public and index funds would be forced to buy their stock. That means that if you are an index fund investor, you may soon be investing in these companies whether you like it or not. The problem is that most IPOs are terrible investments and these ones in particular raise some questions. I'm Ben Felix, chief investment officer at PWL Capital, and I'm going to tell you what the upcoming mega IPOs mean for you and your portfolio. In this video, I'm going to take you

through how stock indices and the index funds tracking them include IPOs, how this might affect index fund returns, and what you can do about it. I'll also cover whether index fund investors are missing out on private market returns, which is a common perception based on companies staying private longer. Index funds are generally great investments because they roughly deliver the returns that the public stock market has to offer. Since their primary role is representing the stock market, some stock indices aim to include new IPOs soon after the company goes public. This makes sense for the purpose of representing the public stock market. But the problem for index fund investors is that IPOs have had historically terrible returns. I'll come back to that point later. Index funds today control trillions of dollars. So, if you're a new company listing on the stock market or an investment bank facilitating an IPO, getting the stock included in a major index or multiple indices can mean huge investment dollars flowing into its shares on the public market as index funds are forced to buy, giving sellers liquidity and pushing up the share price. This makes index inclusion very desirable for shareholders of the newly listed company, but probably not so much for the index fund investors who are left holding the bag. And it is often a bag that they are left holding. Companies tend to go public when they think they can sell their stock at a high price. Meaning, the moment you can buy their stock on the secondary market is precisely when the insiders believe it's overvalued or at least nicely valued. If you're an investor, you probably don't want to buy an overpriced stock, but index funds don't have that kind of discretion. They're forced to gobble up whatever is included in the index, regardless of its price. The IPO

inclusion rules vary across indices. For example, as of right now, the S& P 500 requires a stock to have been trading on a public exchange for 12 months before inclusion, while the S& P total market index allows for inclusion within 5 days for stocks that meet certain criteria. This is called fasttrack entry which is important to understand. Basically stocks that meet certain criteria can be eligible for near immediate inclusion in some total market indices. As I mentioned, the S& P 500 has historically required shares to trade for a year before inclusion. But as reported by Bloomberg, S& P may be considering an S& P 500 rule change to accelerate the inclusion of mega IPOs like SpaceX. NASDAQ is considering similar changes for the NASDAQ 100 to accelerate inclusion. The implications here for index fund investors are important. A 2025 paper looks at how fast track entry into Crisp, that Center for Research and Security Prices Indices affects stock returns and IPO deal structure. VTI, for example, a large ETF, tracks the CRISP US total market index. Crisp adds eligible securities to the index within as few as 5 days for fasttrack entry. The authors of this paper show that expected index investor demand for IPO shares causes FastTrack IPOs to outperform their non-fastrack counterparts by over 5 percentage points following their listing. This outperformance peaks at the index inclusion date and reverts significantly within two weeks thereafter. Basically, index funds are being frontr run by intermediaries like hedge funds who know that index funds are going to be buying the shares once they become eligible for index inclusion and then the index funds end up holding the shares as they revert back down closer to their IPO price. The authors call this a shadow tax largely paid by index fund investors. It's like ticket scalpers for concerts and sports events. Another important index definition that's proving to be relevant to mega IPOs is the concept of free float. Free float is the proportion of a company's shares that are available for purchase in the public equity market. Most major indices have a minimum float requirement and weight stocks by their public float. A company could go public while only making a small portion of their overall market capitalization freely available on the public exchange. This would be referred to as a lowflat IPO. As reported by the Financial Times, SpaceX plans to float less than 5% of its equity, much lower than the average IPO. With a $ 1. 75 trillion valuation, but only a 5% public float, most indices would weight it at its float of 88 billion, and many would actually exclude it altogether. NASDAQ currently has a 10% minimum float and weight stocks based on the value of all listed shares of the company with no regard for free float, which is unique. But they recently approved rule changes following a public consultation to speed up IPO inclusion, eliminate the lowflat cutoff, and introduce a float factor in their waiting of lowflat stocks. The cynical view on this is that NASDAQ is changing the NASDAQ 100 index rules to win SpaceX over in an effort to get their listing on the NASDAQ exchange. including in the index would force significant index fund buying, which likely ends up being good for SpaceX, its early investors, and NASDAQ, but potentially comes at the expense of NASDAQ 100 index fund investors. Some indices like the crisp US total market index tracked by VTI continue to have a low float cutoff of 10% for fasttrack entry into the index. Between inclusion criteria and index waiting methodologies, there's some uncertainty about how these mega IPOs will initially show up in indices. But there's no question that their listings will change the public market over time. That's likely why index providers are considering making changes to get these companies represented in their indices. To reiterate a point from earlier, indices are meant to represent the stock market. A blog post from index provider

S& P Global shows that just SpaceX, OpenAI, and Anthropic would make up 2. 9% of the S& P World Index at their full market caps. That's almost as much as Canada. But these numbers assume that the total market cap of the companies is included in the index. Since many of these IPOs are expected to have low public floats, that should be accounted for in estimating their market impact. In another blog post, index provider MSCI calculated the potential changes to the MSCI allcountry world investable market index in the event of some of the largest private companies going public in 2026. This was written back in February 2026 when SpaceX had a quaint valuation of only 800 billion, but the general points are still relevant. They ask in the blog post what would happen to the index to this world index if the 10 largest companies from the Msei all country venturebacked private company index went public. Since the free float at the time of listing is unknown, they go through a few scenarios. At a 5% float, only four of the 10 large private companies would achieve index inclusion based on MSCI's inclusion rules. At a 10% float, seven of the 10 companies would achieve index inclusion, but not at enormous weights in the index. While the overall market weight changes in percentage terms would not be huge, even at a 25% float scenario, MSEI finds that the dollar flows just for funds tracking MSCI indices would be huge with newly listed private companies receiving billions in investor dollars and the largest existing public companies seeing billions in outflows. These flows are what ultimately matter to index fund investors who are being forced to buy shares. Okay, so index funds, depending on the rules of the specific indices they track, may or may not invest in these mega IPOs. And even if they do, it will likely be at a weight reflecting their public float, except for the NASDAQ 100, which as of recently would use its newly adopted float factor. An important piece of understanding this

whole situation is the empirical fact that investing in IPOs is one of the worst investment strategies that exists. Before I get to that though, make sure to subscribe if you haven't already. I make nerdy research-driven videos to help you make more informed financial decisions. Okay, IPOs tend to have a first day pop where the price on the public market jumps up relative to the IPO price, but most investors don't get the IPO price. Investing in the shares once they are listed on the public market, so after the pop has been rough to say the least. The consistent pattern of IPO underperformance even has a name. It's the new issues puzzle coined in a highly cited 1995 paper which found that companies issuing stock from 1970 to 1990 tended to be poor investments. The paper finds that investors in IPOs receive average returns of only 5% per year while similar listed firms returned 12% over the same period. The paper notes that to achieve the same wealth 5 years later, an investor would have had to put 44% more money into the new issues in the sample than into established firms of the same size. A more recent 2019 study from Dimensional Fund Advisors looked at the first year secondary market performance of more than 6,000 IPOs from 1991 to 2018 and found that a portfolio of IPOs generally underperformed the market and a small cap index by about 2% per year. The main exception to this finding was in the 1992 to 2000 period when the IPO portfolio outperformed the small gap index by about 1. 1% annually mainly due to IPOs consisting of small tech companies that took off in the dotcom boom and uh I mean we all know what happened after that. The study found that these poor returns were largely explained by the factors in the FM and French five factor asset pricing model. The IPO portfolio behaves like a portfolio of small growth, lowprofitability, high investment stocks, also known as junk or small crap growth. These types of stocks are more volatile and tend to lag behind the broader market. We don't even need these papers though. These findings are easy for anyone to replicate and update today because of course there is an ETF for IPOs. The Renaissance IPO ETF exclusively invests in large US IPOs when they list and then sells the shares after they've been public for three years. It has underperformed VTI which tracks the total US market by more than six percentage points annualized since inception in October 2013. And as expected, it behaves like a portfolio of small stocks with high prices, low profitability, and aggressive asset growth. Similar results can be found internationally since 2014 with the Renaissance International IPO ETF IPOS. Yes, that is the real ticker. Professor Jay Ritterder, co-author of the new issues puzzle, maintains an up-to-date database of IPO returns. In that data spanning 1980 through 2023, the average three-year buy and hold return for IPOs purchased on the secondary market trails the market by 19 percentage points. Lowflat IPOs look particularly bad. Remember, a lowflat IPO means that only a small portion of the company's shares are available for public trading, which can amplify price swings because demand is concentrated on a limited supply. This is widely expected to be the approach for companies like OpenAI and SpaceX. Lowflat IPOs for high revenue companies are rare, but they're not totally unheard of. I reached out to Professor Ritterder, a past guest on my podcast, to see if he had any data on large lowflat IPOs specifically. He sent me this table, which you nerds are getting an exclusive look at. He found 11 lowflat, that is below 5% float IPOs for companies with inflationadjusted trailing 12-month sales of $100 million or more going back to 1980. 10 of the 11 IPOs underperformed the market within three years with average underperformance of roughly 50% from the offer price and over 60% from the first day close suggesting that constrained to supply may drive early price spikes but tends to be followed by significant underperformance. He also mentioned that these examples tended to have high price to sales ratios at the time of IPO which is very relevant for the current potential mega IPOs. If SpaceX were to achieve a $ 1. 75 trillion valuation, it would have a price to sales ratio of more than 100 times based on trailing sales. For context, the highest price to sales ratio for an S& P 500 constituent today is Palanteer's 73 times, while the index as a whole trades at a price to sales of 3. 1 times. In general, high valuations are associated with low expected future returns. For index fund

investors, this problem is complicated. When large private companies go public with high valuations, they change the landscape of the broader market. In response, indices must rebalance to remain reflective of the broader market. Market cap weighted indices must rebalance in response to stock market composition changes, which in some cases can include IPOs. In doing so, index funds implicitly engage in market timing. The problem is that it tends to be really bad market timing. Issuers, that's like companies listing on the public market, will generally want to issue stock when their valuation is high, when they believe their valuation is high and buy it back when their valuation is low. Index funds in their effort to track the indices that reflect the market end up buying high and selling low. The 2025 paper index rebalancing and stock market composition, do indexes time the market? estimates that this timing ends up creating a performance drag of between 47 and 70 basis points per year relative to a delayed rebalancing approach. In other words, there is a lasting negative effect on your portfolio that could have been avoided had your index fund prioritized expected returns rather than tracking error to its index. Listen, I'm a huge fan of index funds, but this issue right here is one of the reasons that I don't use them personally or for the clients of PWL Capital. I use funds from Dimensional Fund Advisors, which are a lot like index funds, but don't track an index, and intentionally avoid investing in IPOs for about a year after the company lists. They also intentionally tilt away from the junk that IPOs tend to behave like more generally. To be clear, my firm PW Capital does use Dimensional Funds, but I was not paid by Dimensional or anyone else to say this, and I gain nothing from you using their products. With

companies staying private longer and going public when they're larger, the next question that is natural to ask is whether investors should be seeking exposure to private company shares before they go public. There are a couple of things to think about here. There's a huge amount of survivorship bias in private company outcomes. For every SpaceX or Open Eye that we hear about, there are thousands of companies that did not grow or failed entirely. This skewess exists in public markets too, but it's even more brutal, even more pronounced in private markets. Additionally, the fees and costs associated with private company investments can often absorb the financial benefits of owning them. This has been true with private equity funds in general, which have delivered net of fee returns in line with public markets. There are some wild stories floating around right now about the lengths people have gone to buy what they hope is exposure to companies like SpaceX. One specialurpose vehicle reported on by Wall Street Journal had a 4% upfront fee with an additional fee of 25% of future profits. There are also questions about who owns what due to the complicated structures. And of course, there are stories of outright fraud. I think people imagine all the money they will make if they can buy some SpaceX shares at a low valuation and then sell when it goes public. But unless you're an employee or otherwise have direct access to the company's shares, financial intermediaries that do have access are not typically going to give you access to the equity on terms that are better for you than they are for the intermediary. Financial intermediaries don't tend to be in the business of giving you money for free. Some ETFs have gotten exposure to SpaceX shares either directly or through specialurpose vehicles. One example that has attracted a lot of attention is the ERS shares private public crossover ETF. It bought into SpaceX through an SPV in December 2024. SPVS are not particularly liquid. So, this ETF has had to deal with some unique practical issues as a liquid ETF holding a large stake in an illlquid asset. But even more interesting to me at least is that despite SpaceX reportedly rising in value substantially since this ETF invested in it back in December 2024, the fund has lost money in absolute terms and even more so relative to the market. There are multiple reasons for this and it gets complicated quickly and that's part of the problem. As Jeff Tac, managing director for Morning Star Research Services, widely noted in his analysis of XOVR, when it comes to investing, the more you covet something, the more you should probably question your desire to own it in the first place. Investors are so eager to get a piece of SpaceX that, at least in this case, they got burned. Some good news is that while it's generally difficult to get access to the private company shares that you really want, a lot of public companies make strategic investments into private companies. Public market investors are not entirely locked out of private markets. Okay. What does all this mean

for you, the index fund investor? Yes, it's possible that these upcoming mega IPOs will affect market indices and the index funds tracking them, especially if these companies are fasttracked for index inclusion. Due to index fund mechanics, index funds will buy up IPO shares that are included in the index at any price, leading to adverse selection and potentially even making the problem worse for themselves as they bid the price of the stocks up. If you're an index fund investor already, this is a cost you have been paying an implicit cost. Maybe these cases are a bit more extreme, but this is part of the indexing lifestyle. You can either accept it and carry on or look at alternatives like dimensional funds that are similarly lowcost and broadly diversified but don't auto invest in IPOs. No, you probably can't get access to these private company shares prior to their IPOs. When everyone wants to buy something, either its price or the cost of accessing it will absorb a huge portion of the benefit you think you're going to get from investing in it. If you're interested in learning more about how poorly IPOs perform, click here. Or if you're interested in learning about why PWL Capital uses dimensional funds to construct client portfolios, you can click right here.