SpaceX and OpenAI IPOs Looming—Your Index Fund Might Be Forced to Buy at the Top

Source: Ben Felix Podcast

Compiled by: Felix, PANews

Editor's Note: Recently, Musk's SpaceX has confidentially submitted an IPO registration document to the U.S. SEC, aiming for a listing as early as June. The company plans to raise $50-75 billion, with a target valuation of approximately $1.75 trillion, potentially making it the largest IPO in history.

However, amid market euphoria, some experts point out that such mega-IPOs could be a "disaster" for retail investors, especially those in index funds. Ben Felix, Chief Investment Officer at PWL Capital, recently stated on his podcast that mega-IPOs like SpaceX and OpenAI are elaborately designed "scams" and explained what the upcoming super-IPOs mean for retail investors and their portfolios.

PANews has compiled the podcast highlights. Here are the details.

If private companies like SpaceX, OpenAI, and Anthropic go public, they will rank among the world's largest companies. For index fund investors, this means that whether you are bullish on these companies or not, your capital will be forced into buying their stocks.

The original purpose of index funds is to perfectly replicate the performance of the public stock market. To track the market as closely as possible, many index rules require companies to be added to the index as soon as possible after their IPO. While this makes sense from a macro representation perspective, historical data shows that blindly buying IPO stocks often yields dismal returns from an investment standpoint.

Now that index funds control trillions of dollars, when a newly listed stock is added to a major index, it triggers massive inflows of capital into that stock. Because index funds are forced 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 are forced to become the "bag holders."

Companies tend to go public when they believe they can sell at a high price. This means that when ordinary investors finally get the chance to buy the stock on the secondary market, it is precisely when company insiders believe the stock is overvalued or priced at its peak. Investors typically don't want to buy overvalued stocks, but index funds lack this discretion. Regardless of the price, they must buy any stock included in the index.

Different indices have varying rules for including IPOs. For example, the current S&P 500 requires a stock to trade on a public exchange for 12 months before being eligible for inclusion. In contrast, the S&P Total Market Index allows stocks meeting specific criteria to be included as soon as five days after listing, a process known as "fast entry."

According to Bloomberg, S&P is considering modifying the rules of the S&P 500 to accelerate the inclusion of mega-IPOs like SpaceX; Nasdaq is also contemplating similar adjustments for the Nasdaq 100 Index.

A 2025 paper studied the impact of "fast entry" into the CRSP US Total Market Index (tracked by large ETFs like VTI, eligible for inclusion in as few as 5 days) on stock returns. The authors found that because of the anticipated forced buying by index investors, IPOs taking the "fast entry" route tend to outperform their non-fast-track counterparts by over 5 percentage points in the post-listing period. However, this abnormal performance peaks on the index inclusion date and significantly retraces over the following two weeks. Essentially, index funds are being "front-run" by intermediaries like hedge funds, who know that once a stock qualifies for index inclusion, index funds will buy it. When the stock price subsequently falls back near its IPO price, the index funds are left holding it. The authors describe this as a high "invisible tax" paid by index fund investors, with these intermediaries acting like scalpers reselling concert tickets.

Another critical concept related to mega-IPOs is the "public float," which is the percentage of a company's shares available for trading on the open market. Most major indices have minimum float requirements and determine stock weights based on the public float. Some companies go public issuing only a tiny fraction of their total market capitalization, known as a "low-float IPO."

According to the Financial Times, SpaceX plans an IPO with a public float of less than 5%, well below the average. Even with a $1.75 trillion valuation, with only a 5% float, most indices would assign it a weight based on only $88 billion, and many indices might exclude it altogether. Nasdaq originally had a 10% minimum public float requirement, but after a recent public consultation, they approved rule changes that not only accelerate IPO inclusion but also remove the lower limit for the float threshold.

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

Despite differences in index construction, there is no doubt these mega-IPOs will reshape the public market landscape. A blog post from S&P Global noted that just SpaceX, OpenAI, and Anthropic could account for 2.9% of the S&P Global Index's weight, almost equivalent to the entire Canadian market. MSCI, in a February 2026 blog post, estimated the impact of the top 10 private companies going public (estimating SpaceX's valuation at just $800 billion at the time, but the general point remains valid): With a 5% float, only 4 companies would be included; with a 10% float, 7 could be included. MSCI found that even with a 25% float calculation, the forced portfolio adjustments by index funds would lead to massive capital flows: newly listed companies would attract tens of billions of dollars, while the largest existing listed companies would see tens of billions flow out. These forced capital flows ultimately impact the interests of index fund investors.

The core fact to understand this phenomenon is: investing in IPOs is one of the worst investment strategies available. While IPOs often surge on their first trading day, most investors cannot access the offering price and must buy after the public market rally, with subsequent performance often being terrible.

This underperformance of IPOs even has a specific term: the "new issues puzzle," first proposed in a 1995 paper. That paper found that IPOs between 1970 and 1990 had an average annual return of just 5%, compared to 12% for similar-sized listed companies during the same period. To achieve the same return after five years, an investor would need to invest 44% more in the IPO.

A 2019 study by Dimensional Fund Advisors (DFA) analyzed the first-year secondary market performance of over 6,000 IPOs from 1991 to 2018, finding that IPO portfolios underperformed the broad market and small-cap indices by about 2% annually. The only exception was during the 1992-2000 internet bubble, when small-cap tech IPOs boomed, followed by the well-known crash. The study noted that IPO stocks exhibit characteristics similar to "small, high-growth expectation, low-profit margin, aggressive expansion" stocks, often called small-cap growth garbage stocks, which are highly volatile and chronically underperform the market.

This is also confirmed by IPO-focused ETFs. The Renaissance IPO ETF, which specifically invests in large new U.S. stocks, has underperformed the total U.S. stock market ETF (VTI) by over 6 percentage points annually since its inception in October 2013. IPO expert Jay Ritter's IPO return database shows that between 1980 and 2023, IPOs bought on the secondary market and held for three years underperformed the broad market by an average of 19 percentage points.

Low-float IPOs perform even worse, as the limited supply of tradable shares concentrates demand, severely amplifying price volatility. This is the widely expected listing method for OpenAI and SpaceX.

Data shared by Ritter shows that since 1980, there have been only 11 low-float (i.e., less than 5% public float) IPOs with inflation-adjusted trailing twelve-month sales of $100 million or more. Of these, 10 IPOs underperformed the market over three years, lagging the offering price by an average of about 50% and the first-day closing price by over 60%. This indicates that supply constraints do drive early price spikes, but this is often followed by significant underperformance.

Furthermore, the price-to-sales (P/S) ratios of these IPOs are often extremely high at listing. If SpaceX lists at a $1.75 trillion valuation, its P/S ratio would exceed 100x. For comparison, Palantir, currently with the highest P/S ratio in the S&P 500, is at 73x, while the overall S&P index average is just 3.1x.

In general, high valuations are associated with lower expected future returns. For index fund investors, this problem is more complex. When large private companies go public at high valuations, they alter the makeup of the broader market. In response, indices must rebalance to maintain representation of the broader market.

Market-cap-weighted indices must rebalance to reflect changes in market composition, meaning index funds implicitly engage in "market timing." The problem is that this is often very poor market timing. Companies tend to issue shares and go public when valuations are sky-high and buy back shares when valuations are depressed. Consequently, index funds, in their quest to track the index, end up forced to buy high and sell low.

A 2025 paper estimates that this passive timing caused by index rebalancing drags down portfolio performance by 47 to 70 basis points (0.47% - 0.70%) annually.

Given that companies are staying private longer, should ordinary investors try to invest in private companies before their IPOs? Several serious issues exist here:

Survivorship Bias: For every SpaceX or OpenAI you hear about, there are thousands of private companies that have failed or not grown. Survivorship bias in the private market is far more brutal than in the public market.

Extremely High Implicit Fees: Fees and costs associated with private company investments often eat away the 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% front-end fee and an additional 25% cut of future profits. There are also risks of unclear ownership due to complex structures and outright fraud.

Liquidity Drought and Paradoxical Losses: Unless you are an insider, financial intermediaries with access to private equity shares will not simply hand you a gift. For example, the ERSShares Private-Public Crossover ETF (XOVR) bought SpaceX through an SPV in December 2024. Despite SpaceX's subsequent valuation surge, the ETF faced practical issues due to the SPV's illiquidity. As a liquid ETF holding significant illiquid assets, the fund not only incurred absolute losses but also severely underperformed the market.

As Morningstar Director Jeff Ptak pointed out: "In investing, the more desperate you are for something, the more you should probably question that initial desire to own it." Investors were too eager for a piece of the action, and in this case, it backfired.

For index fund investors, mega-IPOs will inevitably impact market indices and the funds that track them, especially when these companies are granted "fast entry." Constrained by their operational mechanism, index funds will blindly buy these IPO stocks at any price, and the massive buying demand could further inflate the cost of acquisition.

If you are an index fund investor, this is an implicit cost you have been paying, or perhaps a cost you must accept as part of the indexing lifestyle. You can choose to tolerate and accept it, or seek alternative products that do not blindly auto-purchase IPO stocks. Ultimately, it is nearly impossible for ordinary people to get shares in these scarce private companies before their IPOs; when everyone is scrambling to buy, their high price or barrier to entry will inevitably eat away most of the returns you might expect to gain.