SpaceX and OpenAI are about to go public; the index funds you hold may be forced to "buy at high prices."

Source: Ben Felix Podcast

Curated by: Felix, PANews

Editor’s note: Recently, SpaceX, Musk’s company, has secretly submitted IPO registration documents to the U.S. SEC, with the goal of going public as early as June. The company plans to raise $50-75 billion, with a target valuation of about $1.75 trillion—potentially becoming the largest IPO in history.

But amid the market’s excitement, some people have also pointed out that these kinds of mega IPOs are a “disaster” for retail investors, especially those who invest in index funds. Ben Felix, Chief Investment Officer at PWL Capital, recently said on a podcast that mega IPOs such as SpaceX and OpenAI are a carefully designed “scam,” and shared what the upcoming mega IPOs will mean for retail investors and their portfolios.

PANews has compiled the highlights from the podcast. The details are as follows.

If private companies like SpaceX, OpenAI, and Anthropic go public, they will join the ranks of the world’s largest companies. For index fund investors, this means that regardless of whether you are bullish on these companies, your money will be forced to buy their stocks.

The original purpose of index funds is to perfectly replicate the performance of the public stock market. To get as close to the market as possible, many index rules require that companies be included as soon as possible after they list. From the perspective of macro representation, this is understandable, but from the perspective of investment returns, historical data shows that blindly buying IPO stocks often results in poor outcomes.

Today, index funds control trillions of dollars. When a newly listed stock is added to major indices, it means that a huge amount of capital will flow into that stock. Because index funds are required to buy, this provides ample liquidity for sellers and pushes up the stock price. This is extremely beneficial for shareholders of the newly listed company (such as insiders and early investors), but not for index fund investors, who end up having to become the “bagholders.”

Companies typically prefer to go public when they believe they can sell at a high price. This means that when ordinary investors finally get a chance to buy the stock in the secondary market, it is often exactly the moment when company insiders believe the stock is overvalued or priced very high. Investors generally do not want to buy overvalued stocks, but index funds do not have that discretion. No matter what the stock price is, they must buy any stocks that are included in the index.

Inclusion rules for IPOs differ across different indices. For example, the current S&P 500 requires that a stock has been traded on a public exchange for 12 months before it can be included; while the S&P Total Market Index allows stocks that meet certain criteria to be included just 5 days after listing. This is known as “fast entry.”

According to Bloomberg, S&P is considering changing the rules of the S&P 500 in order to accelerate the inclusion of mega IPOs like SpaceX; Nasdaq is also considering similar adjustments to the Nasdaq 100.

A 2025 paper studied the impact of “fast entry” CRSP U.S. Total Market Index (tracked by large ETFs such as VTI, which can include stocks in as fast as 5 days) on stock returns. The authors found that, because index investors are expected to be forced to buy, IPOs that take the “fast entry” route tend to perform more than 5 percentage points better after listing than IPOs that do not take the fast route. However, this excess return peaks on the index inclusion date and then drops sharply over the following two weeks. Essentially, index funds are being “front-run” by intermediaries such as hedge funds. These intermediaries know that once a stock meets the index inclusion requirements, index funds will buy it, and then hold the stock as the price falls back toward its IPO price. The authors call this a costly “invisible tax” paid by index fund investors, with these intermediaries acting like scalpers reselling concert tickets.

Another important concept related to mega IPOs is “free float,” meaning the proportion of a company’s shares that are available for purchase in the public market. Most major indices have minimum free-float requirements and determine stock weights based on free float. Some companies release only a very small fraction of their total market cap at IPO—this is called a “low float IPO.”

According to the Financial Times, SpaceX plans to list with a free-float ratio of less than 5%, far below the average level. Even if its valuation reaches $1.75 trillion, with only 5% free float, most indices would assign it a weight of only $88 billion; and many indices would even exclude it entirely. Nasdaq originally had a minimum 10% free-float requirement, but after recent public consultation, they approved a rule change—accelerating IPO inclusion and also removing the lower free-float threshold.

A pessimistic view is that Nasdaq’s change to the rules for the Nasdaq 100 is designed to attract SpaceX to list on its exchange. If SpaceX is included in Nasdaq’s index, it will force index funds to buy heavily. This is good news for SpaceX, its early investors, and Nasdaq itself, but the cost will very likely be borne by investors in the Nasdaq 100 index.

Although index construction differs, there is no doubt that these mega IPOs will reshape the public-market landscape. A blog post by S&P Global points out that just SpaceX, OpenAI, and Anthropic alone could account for 2.9% of the weight in the S&P Global index—almost equivalent to the weight of the entire Canadian market. In a February 2026 blog, MSCI calculated the impact of the top 10 private companies going public (at that time, SpaceX was forecast to be valued at only $800 billion, but the overall conclusion still applies): with 5% free float, only 4 companies could be included; with 10% free float, 7 could be included. MSCI found that even at 25% free float, the capital flows forced by index adjustments are enormous: newly listed companies will attract billions of dollars, while the largest existing listed companies will experience billions of dollars flowing out. These forced buying flows ultimately affect index fund investors’ interests.

The key fact behind understanding this phenomenon is: investing in IPOs is one of the worst investment strategies available. While IPOs often surge on the first day, most investors cannot buy at the offering price at all; they can only step in after the stock has already skyrocketed in the public market, and their subsequent performance is often disappointing.

This poor IPO performance even has a proprietary term: the “IPO puzzle,” first proposed in a 1995 paper. The paper found that between 1970 and 1990, the average annual return of IPOs was only 5%, while the return of similarly sized already-listed companies in the same period was 12%. To achieve the same return after 5 years, investors would need to invest 44% more of their capital in IPOs.

Dimensional Fund Advisors (DFA) analyzed the first-year performance in the secondary market of more than 6,000 IPOs from 1991 to 2018. It found that IPO portfolios underperformed the broad market and small-cap indices by about 2% per year. The only exception was during the 1992-2000 internet bubble period, when small technology IPOs soared, followed by a crash that is well known. The study notes that IPO stocks exhibit characteristics similar to “small, high-growth expectations, low profit margins, aggressive expansion,” which are often referred to as small “junk growth stocks”—extremely volatile and persistently lagging the broad market over the long term.

This is also reflected in ETF products focused on IPOs. Since it launched in October 2013, the Renaissance IPO ETF, which specifically invests in U.S. large IPOs, has delivered annualized returns that trail the total U.S. stock market ETF (VTI) by more than 6 percentage points. Jay Ritter’s IPO return database shows that from 1980 to 2023, IPO stocks bought and held for three years in the secondary market averaged underperformance versus the broad market by 19 percentage points.

Low-float IPOs perform even worse because the limited supply of tradable shares, combined with concentrated demand, significantly amplifies price volatility. This is exactly the listing approach that outsiders widely expect OpenAI and SpaceX to take.

Ritter’s shared data shows that since 1980, there have only been 11 low-float IPOs (i.e., below 5% free float). For these companies, their inflation-adjusted sales over the prior 12 months were at least $100 million. Of these, 10 IPOs underperformed the market within three years, with an average decline of about 50% from the offering price, and a drop of more than 60% from the first-day closing price. This indicates that constrained supply does drive early price surges, but it is often followed by substantial underperformance relative to the market.

In addition, these IPOs typically have extremely high price-to-sales (P/S) ratios at the time of listing. If SpaceX were to go public at a valuation of $1.75 trillion, its P/S ratio would exceed 100. For comparison, the highest P/S ratio in the S&P 500 currently belongs to Palantir at 73, while the overall S&P 500 average is only 3.1.

Overall, high valuations are generally associated with lower expected future returns. For index fund investors, this issue is more complicated. When large private companies go public at high valuations, they change the broader market landscape. In response, indices must rebalance to keep reflecting the broader market.

Market-cap-weighted indices must be rebalanced to reflect changes in market composition, which means index funds implicitly participate in “market timing.” The problem is that this is usually very poor market timing. Companies often issue shares when valuations are extremely high and repurchase shares when valuations are weak. As a result, index funds trying to track the index end up buying high and selling low.

A 2025 paper estimated that this kind of passive market timing caused by index rebalancing drags portfolio performance by 47 to 70 basis points (0.47% - 0.70%) per year.

If companies are staying private for longer before going public, should ordinary investors try to look for opportunities to invest in private companies before the IPO? There are several serious issues here:

Survivorship bias: For every SpaceX or OpenAI you hear about, there are thousands of private companies that fail or do not grow. The survivorship bias in private markets is far more brutal than in public markets.

Extremely high hidden fees: The related fees and costs tied to private equity investments often consume returns from holding them. The Wall Street Journal reported that a special purpose vehicle (SPV) designed to buy SpaceX shares charged up to a 4% upfront fee and additionally took 25% of future profits as a share. In addition, complex structures can make ownership unclear, and there is also the risk of outright fraud.

Liquidity crunch and abnormal losses: Unless you are an insider, financial intermediaries that control access to private shares will not simply hand you the “pie from the sky.” For example, ERSShares Private-Public Crossover ETF (XOVR) bought SpaceX through an SPV in December 2024. Even though SpaceX’s valuation subsequently surged significantly, because the SPV lacked liquidity, the ETF held a large amount of illiquid assets as a “liquidity ETF,” facing a series of practical problems. As a result, the fund not only suffered absolute losses, but also severely underperformed the broader market.

As Jeff Ptak, a director at Morningstar, pointed out: “In investing, the more you desire something, the more you should question the desire itself—whether you really want it in the first place.” Investors’ eagerness to get a piece of the pie ended up backfiring in this case.

For index fund investors, mega IPOs will inevitably affect the market indices and the funds that track them, especially when these companies are “fast-tracked.” Due to the mechanics of how they operate, index funds will blindly buy these IPO stocks at any price. The massive buying demand will further raise the cost of buying the stock.

If you are an index fund investor, this is one of the implicit costs you have been paying—an unavoidable part of life in index-based investing that you must accept. You can choose to continue enduring it and accepting it, or you can look for alternative products that do not automatically buy IPO stocks blindly. Ultimately, ordinary people almost never get access to these scarce private company shares before an IPO; when everyone is rushing to buy, the high prices or access barriers will inevitably consume most of the gains you expected to capture.

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