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SpaceX and OpenAI are poised for colossal IPOs that could shake up the landscape of index funds irrevocably. These private giants, once public, will be unavoidable holdings for index investors—yet buying into IPOs has a well-documented habit of burning investors. What does this mean for your portfolio as we stare down the barrel of these mega listings?
Forced Into Your Portfolio: The Rise of SpaceX, OpenAI, and Anthropic IPOs
The financial world braces for the public debut of some of the biggest private companies on the planet. SpaceX, OpenAI, and Anthropic, valued at trillions collectively, threaten to command outsized chunks of major stock indices—and by extension, the index funds that mirror them. For investors holding these funds, it’s likely they’ll soon own pieces of these companies whether they want to or not.
This happens because indices aim to reflect the stock market’s current composition. When a major company lists, index committees often feel compelled to add them quickly to maintain relevance. For example, the S&P Total Market Index can include stocks within 5 days of an IPO if the company meets certain criteria. Nasdaq is even revisiting its Nasdaq 100 inclusion rules to fast-track mega IPOs like SpaceX, removing some traditional float restrictions to accommodate these low float offerings.
Why Low Float IPOs Are a Red Flag for Investors
Low float IPOs are when only a tiny percentage of a company’s total shares—sometimes less than 5%—are available to the public. SpaceX reportedly plans to float under 5% of its shares despite a gargantuan $1.75 trillion valuation. This means limited supply meets intense demand, which often causes price spikes on listing day but can lead to sharp declines shortly after.
Data confirms these IPOs tend to underperform. Professor Jay Ritter’s exhaustive research shows that 10 out of 11 large, low-float IPOs underperformed the market over three years, with average declines of roughly 50% from the offer price. Historically, IPO investors see average returns far below those of established companies—roughly 5% annually compared to the broader market’s 12% over similar periods.
The Hidden Cost of Index Inclusion: Buying High, Selling Low
Index funds, by design, are forced buyers. When a mega IPO makes it into an index, funds must purchase shares regardless of how inflated prices might be. This often leads to a classic scenario: companies go public at perceived peaks, insiders sell out at high prices, then the share price drifts downward over following weeks and months.
A 2025 academic study underscored this, showing that IPO shares fast-tracked into indices outperformed their slower counterparts by over 5 percentage points early on but quickly reverted, leaving index investors holding overpriced stock. These dynamics impose a “shadow tax” on passive investors—a costly drag on returns masked within the index-tracking mandate.
Changing Index Rules to Lure Mega IPOs
Nasdaq’s recent move to scrap its 10% minimum float requirement and adjust weighting methodology appears strategically aimed at courting SpaceX’s listing. By guaranteeing inclusion in the Nasdaq 100, Nasdaq ensures a rush of index fund inflows, inflating share prices further—but at the potential expense of index investors, who may bear the brunt of overvaluation.
Meanwhile, the S&P 500, traditionally requiring companies to be publicly traded for a year before index inclusion, is reportedly considering rule changes to speed up the process. With SpaceX, OpenAI, and Anthropic collectively estimated to form 2.9% of the world index by market cap, their arrival won’t go unnoticed.
The Mirage of Private Market Riches
Many investors get caught dreaming about snagging shares before companies go public, hoping for windfall returns. But realities of the private market paint a different picture. For every SpaceX, thousands of private ventures fail or never reach major scale, skewing overall returns negatively.
Access to private shares is also fraught: fees that can absorb gains, complex ownership structures, and sometimes outright fraud. ETFs like the ER Shares Private Public Crossover ETF that bought into SpaceX through special purpose vehicles have experienced losses despite valuations rising—illustrating the opaque challenges of chasing private company returns.
What Should Index Fund Investors Do?
For those invested in traditional index funds tracking major benchmarks, this new IPO wave is a mixed blessing. Sure, owning the market’s biggest players matters, but blindly absorbing IPO shares at premium valuations and low floats may hurt long-term returns.
Alternatives exist. Funds like those from Dimensional Fund Advisors purposely avoid IPO shares for about a year post-listing and emphasize factors like profitability and valuation that IPOs typically neglect. These strategies help sidestep the worst IPO underperformance without sacrificing broad market exposure.
Ultimately, the upcoming SpaceX and OpenAI IPOs represent both a shift and a challenge. They rewrite index compositions, compel massive forced buying, and highlight the often overlooked costs of passive indexing. For savvy investors, understanding these dynamics offers a chance to make more informed portfolio decisions rather than simply accept the status quo.
For readers interested in a deeper dive on why IPOs struggle and how Dimensional funds differ from vanilla index funds, more detailed analysis is available. This evolving story will shape markets and investing norms in the years ahead.