Mega IPOs: What Index Fund Investors Need to Know

The IPO Trap Hidden Inside Your Index Fund

You don't have to buy a single share of SpaceX or OpenAI to end up owning them. If you hold a broad index fund — a VTI, a total market ETF, or even an S&P 500 tracker — you may be forced into these positions the moment they list, regardless of their valuation, regardless of the hype, and regardless of whether the numbers make any sense. That's not speculation. It's how index construction works. And with SpaceX currently valued at roughly $1.75 trillion, OpenAI reportedly valued at over $300 billion, and Anthropic not far behind, the scale of what's coming is unlike anything index fund investors have faced before.

The uncomfortable truth is this: IPOs are historically one of the worst-performing asset classes available to retail investors. The data is consistent, the underperformance is significant, and the mega IPOs expected from the AI and space sectors carry structural features — sky-high valuations, low public floats, and index rule changes engineered to accommodate them — that make them look even worse on paper. Here's what the evidence actually shows, and what it means for your portfolio.

Why IPOs Consistently Underperform the Market

The academic record on IPO performance is remarkably clear. The so-called "new issues puzzle," named in a landmark 1995 paper, documented that companies issuing stock between 1970 and 1990 returned an average of just 5% per year in the years following their listing, compared to 12% annually for comparable established firms. To end up with the same wealth after five years, an investor would have needed to commit 44% more capital to the IPO portfolio than to an equivalent basket of listed companies.

That was 30 years ago. More recent data tells the same story. A 2019 study from Dimensional Fund Advisors analysed more than 6,000 IPOs from 1991 to 2018 and found that a portfolio of newly listed stocks underperformed the broader market and a small-cap benchmark by approximately 2% per year. The one notable exception was the 1992–2000 window, when small tech IPOs briefly outperformed — right before the dot-com collapse wiped out much of those gains.

Want a real-time experiment? The Renaissance IPO ETF does exactly what it sounds like: it buys large US IPOs at listing and holds them for three years. Since its October 2013 inception, it has underperformed VTI — a plain total market index fund — by more than 6 percentage points annualised. There is now an international version with a similarly grim track record.

Professor Jay Ritter, co-author of the new issues puzzle, maintains a live database of IPO returns. His data spanning 1980 through 2023 shows that the average three-year buy-and-hold return for IPOs purchased on the secondary market trails the market by 19 percentage points. That's not a rounding error. That's a structural feature of how IPOs work.

The reason comes down to incentives. Companies go public when their insiders believe valuations are favourable — for the sellers. The moment shares hit the secondary market is precisely when the people who know the company best think the price is at or above fair value. Index fund investors, who have no discretion over what they buy, walk straight into that.

Low-Float IPOs: The Worst of a Bad Situation

Not all IPOs are created equal. The expected structure of the SpaceX and OpenAI listings introduces a feature that makes the historical underperformance look almost mild by comparison: low public float.

SpaceX has reportedly indicated it plans to float less than 5% of its equity. With a valuation of $1.75 trillion, that means only around $87–88 billion worth of shares would actually be available for public trading. The rest stays with insiders. Low float creates concentrated demand against a limited supply of shares, which can produce sharp early price spikes — but those spikes tend to revert, and hard.

Ritter analysed 11 low-float IPOs (below 5% float) for companies with inflation-adjusted trailing revenues of $100 million or more, going back to 1980. The results:

• 10 of 11 underperformed the market within three years
• Average underperformance of roughly 50% from the offer price
• Average underperformance of over 60% from the first-day close

These companies also tended to list at high price-to-sales ratios — which is directly relevant here. If SpaceX lists at a $1.75 trillion valuation against its current trailing revenues, it would imply a price-to-sales ratio of more than 100 times. For context, Palantir — widely considered one of the most expensively priced S&P 500 constituents — trades at around 73 times sales. The entire S&P 500 index trades at roughly 3.1 times sales. These are not comparable situations.

High valuations at listing are not just a cosmetic concern. Decades of asset pricing research confirm that high-multiple stocks — particularly those characterised as small, high-growth, low-profitability, and aggressively investing — tend to generate below-average future returns. Dimensional's analysis found that IPO portfolios behave almost identically to this type of stock. The academic term is "small growth with low profitability and high investment." The blunt term is junk.

How Index Rules Are Being Rewritten — and Who Benefits

Here is where the story gets more troubling for passive investors. The scale of these potential listings has prompted index providers to consider — and in some cases already implement — rule changes that accelerate inclusion and loosen float requirements. The beneficiaries of these changes are not index fund holders.

Currently, the S&P 500 requires a stock to have traded publicly for 12 months before inclusion. Bloomberg has reported that S&P is weighing changes to accelerate inclusion for mega IPOs. Nasdaq has already approved rule changes for the Nasdaq 100 that would speed up IPO inclusion, eliminate its 10% minimum float cutoff, and introduce a float-adjusted weighting factor for low-float stocks. The cynical — but hard to dismiss — reading of this is that Nasdaq altered its index methodology specifically to win the SpaceX listing on its exchange, knowing that index inclusion forces billions in automatic buying from passive funds.

This creates a situation where:

1. SpaceX lists with a low float and a very high valuation
2. Index rule changes allow near-immediate inclusion in major indices
3. Index funds are forced to buy shares, driving prices higher at inclusion
4. Hedge funds and other intermediaries front-run the predictable index demand
5. Index funds end up holding shares that then revert toward fair value

A 2025 academic paper examining fast-track IPO entry into CRSP indices (which underlie funds like VTI) quantified this dynamic. It found that expected index demand causes fast-track IPOs to outperform non-fast-track peers by over 5 percentage points around the listing — but that outperformance peaks at the inclusion date and reverses significantly within two weeks. The authors describe this as a "shadow tax" paid by index fund investors. It functions like ticket scalpers: someone who knows the demand is coming buys first and sells into it.

A separate 2025 paper on index rebalancing estimates that the market timing implied by index composition changes creates a performance drag of 47 to 70 basis points per year relative to a delayed rebalancing approach. For a multi-trillion-dollar asset base, those basis points translate into real money — extracted, systematically, from ordinary investors.

The Private Market Mirage

One common response to all of this is: fine, skip the IPO, buy in earlier. Get exposure to private markets before these companies list and capture the growth that public market investors miss. It's an appealing idea. It also doesn't hold up particularly well under scrutiny.

First, the survivorship bias in private markets is severe. For every SpaceX, there are thousands of private companies that stagnated or failed entirely. The ones that make the news are the ones that worked. The graveyard of failed unicorns does not generate headlines.

Second, fees erode returns at every layer. Private equity funds — the most accessible route for most investors to private company exposure — have historically delivered net-of-fee returns broadly in line with public market equivalents. The gross returns often look better; the net returns, after management fees, carry structures, and fund expenses, tend to converge with what a low-cost index fund would have delivered.

Third, the structures available to retail investors trying to access companies like SpaceX pre-IPO are often genuinely dangerous. One special purpose vehicle reported on by the Wall Street Journal charged a 4% upfront fee plus 25% of future profits, with serious questions about what investors actually owned given the layered legal structures involved. Stories of outright fraud in this space are not rare.

The ER Shares Private Public Crossover ETF (ticker: XOVR) offers a cautionary case study. It purchased SpaceX exposure through a special purpose vehicle in December 2024. Despite SpaceX reportedly increasing substantially in value since that purchase, the ETF has lost money in absolute terms and underperformed the market significantly. As Morningstar's managing director of research Jeff Tack observed: when it comes to investing, the more you covet something, the more you should probably question your desire to own it.

What Index Fund Investors Can Actually Do

None of this means index investing is broken. It remains one of the most reliable ways for most people to capture long-run market returns at low cost. But the mega IPO wave does highlight real structural limitations in strict index-tracking approaches — limitations that are worth understanding before they show up in your returns.

Here are the practical considerations:

• Check what index your fund tracks. A fund tracking the S&P 500 with its 12-month seasoning rule is less exposed to immediate IPO inclusion than a total market fund with fast-track provisions. The Nasdaq 100's new rules make it particularly exposed to the SpaceX and OpenAI listings.
• Understand float weighting. Even if a mega IPO achieves index inclusion, a 5% float means its weight in a float-adjusted index will be a fraction of its headline valuation. MSCI's analysis found that at a 5% float, only four of the ten largest private companies would achieve inclusion in global indices — and at modest weights.
• Consider funds that intentionally avoid IPOs. Some fund managers — Dimensional Fund Advisors being the most prominent example cited in the academic literature — operate funds that deliberately avoid newly listed stocks for approximately a year post-IPO and tilt away from the characteristics that make IPO portfolios underperform. These are not traditional index funds, but they operate at similar cost levels and avoid the shadow tax embedded in fast-track inclusion.
• Be sceptical of private market access products. Unless you have direct access as an employee or early-stage investor, the intermediaries offering you SpaceX exposure at a premium are not doing you a favour. The fees and structural risks typically consume any theoretical upside.

The most important thing may simply be awareness. Index funds do not exercise judgment. They buy what the index tells them to buy, at whatever price the market is offering. When the entities constructing those indices are making rule changes that appear designed to benefit the companies listing — and the exchanges hosting those listings — rather than the investors tracking them, that is worth knowing.

Conclusion: The Passive Investor's Dilemma

The coming wave of mega IPOs from SpaceX, OpenAI, Anthropic, and others will reshape the public equity landscape. Index funds will absorb these companies at valuations that strain historical comparisons, through structures engineered to benefit sellers, under index rules that have been modified to facilitate inclusion. The empirical record on IPO returns — and particularly low-float, high-multiple IPOs — is not encouraging.

None of this is a reason to panic or abandon a long-term investment strategy. But it is a reason to understand exactly what you own, how your fund's index handles new listings, and whether the passive vehicle you are using is genuinely working in your interest — or absorbing costs that a more structured approach might avoid.

The numbers suggest that in the IPO market, the house almost always wins. The question is whether your index fund is sitting at the table.

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This article is for informational purposes only and does not constitute financial advice. Always consult a qualified financial professional before making investment decisions.

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Frequently Asked Questions

Will index funds automatically buy SpaceX and OpenAI when they go public?

It depends on the specific index your fund tracks. Funds tracking total market indices with fast-track entry provisions — such as those following CRSP indices — could include eligible IPOs within as few as five days of listing. S&P 500 trackers have historically required 12 months of public trading before inclusion, though rule changes are reportedly under consideration. Nasdaq 100 trackers are particularly exposed following Nasdaq's 2025 rule changes that eliminated minimum float requirements and accelerated IPO inclusion.

Why do IPOs tend to underperform the market?

The core reason is incentive misalignment. Companies choose when to go public, and they typically list when insiders believe the valuation is favourable — for the seller. The secondary market investor is therefore buying at precisely the moment the company's founders and early backers consider the price attractive enough to sell. Academic research spanning decades consistently shows that IPO portfolios behave like small, expensive, low-profitability stocks — a combination associated with below-average long-run returns. The average three-year IPO return trails the market by approximately 19 percentage points, according to data maintained by Professor Jay Ritter covering 1980–2023.

What is a low-float IPO and why does it matter?

A low-float IPO occurs when a company lists publicly but makes only a small percentage of its total equity available for trading — SpaceX has indicated it may float less than 5%. This concentrates demand on a limited share supply, which can produce sharp early price spikes around the listing. However, historical data on low-float IPOs with revenues above $100 million shows that 10 of 11 such companies underperformed the market within three years, with average underperformance exceeding 50% from the offer price. The restricted supply that drives the initial spike tends to work against investors once liquidity improves.

Is buying private market exposure to companies like SpaceX a good alternative?

The data suggests caution. Private equity funds — the most accessible institutional route to private company exposure — have historically delivered net-of-fee returns broadly equivalent to public market benchmarks, meaning the fee structures tend to absorb any return premium from the private premium. For retail-facing products offering access through special purpose vehicles, the fee structures and legal complexities are often severe: one vehicle reported by the Wall Street Journal charged a 4% upfront fee plus 25% of profits. The ER Shares XOVR ETF, which purchased SpaceX exposure through an SPV, lost money in absolute terms despite SpaceX reportedly rising in value over the same period. Survivorship bias also distorts perceptions of private market returns — the failures rarely make headlines.