SpaceX, OpenAI IPOs Looming – Your Index Fund May Be Forced to Buy at "Peak Valuation"

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 to go public as early as June. The company plans to raise between $50 billion and $75 billion, with a target valuation of approximately $1.75 trillion, potentially making it the largest IPO in history.

However, amidst market euphoria, some experts point out that such mega-IPOs could be a "disaster" for retail investors, particularly those holding index funds. Ben Felix, Chief Investment Officer at PWL Capital, recently stated in a podcast that mega-IPOs like SpaceX and OpenAI are carefully orchestrated "scams," and shared what the upcoming mega-IPOs mean for retail investors and their portfolios.

PANews has compiled the highlights of the podcast, the details of which are as follows.

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

The original purpose of index funds is to perfectly replicate the performance of the public stock market. To closely mirror the market, many index rules require companies to be included in the index as soon as possible after going public. From a macro-representativeness perspective, this is unobjectionable. However, from an investment return perspective, historical data shows that blindly buying IPO stocks often yields dismal results.

With index funds now controlling trillions of dollars, when a newly listed stock is added to a major index, it means a massive influx of capital will flow into that stock. Because index funds are forced to buy, this provides ample liquidity for sellers and drives up the stock price. This is extremely beneficial for shareholders of the newly listed company, such as insiders and early investors, but it is not the case for index fund investors who are forced to become the "bag holders."

Companies typically tend to go public when they believe they can sell at a high price. This means that when the average investor finally gets the chance to buy the stock on the secondary market, it is often the moment when company insiders believe the stock is overvalued or priced at a peak. Investors usually don't want to buy overvalued stocks, but index funds lack this discretion. Regardless of the stock 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 stocks to be traded on a public exchange for 12 months before inclusion. In contrast, the S&P Total Market Index allows stocks meeting specific criteria to be included as soon as five days after listing, known as "fast-track eligibility."

According to Bloomberg, the S&P is considering modifying the S&P 500's rules to accelerate the inclusion of mega-IPOs like SpaceX. Similarly, Nasdaq is considering comparable adjustments to the Nasdaq 100 index.

A 2025 research paper studied the impact of "fast-track" inclusion into the CRSP US Total Market Index (tracked by large ETFs like VTI, with a minimum 5-day inclusion period) on stock returns. The authors found that due to the anticipated forced buying by index investors, IPOs entering via the "fast track" tend to outperform non-fast-track IPOs by over 5 percentage points in the period following their listing. However, this excess performance peaks on the index inclusion date and significantly retreats over the subsequent two weeks. Essentially, index funds are being "front-run" by intermediaries like hedge funds. These intermediaries know that once a stock qualifies for index inclusion, index funds will buy it. They profit from the price run-up, and then when the stock price falls back near its IPO price, index funds are left holding it. The authors term this a high "invisible tax" paid by index fund investors, likening these intermediaries to ticket scalpers for concerts.

Another critical concept related to mega-IPOs is the "free float," which is the proportion of a company's shares available for purchase on the public market. Most major indices have minimum free float requirements and use free float to determine a stock's weight. Some companies go public by releasing only a tiny fraction of their total market capitalization, known as a "low-float IPO."

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

A pessimistic view is that Nasdaq is changing the rules for the Nasdaq 100 index 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 this cost will most likely be borne by investors in the Nasdaq 100 index.

Despite differences in index construction, there is no doubt that these mega-IPOs will reshape the public market landscape. A blog post from S&P Global noted that SpaceX, OpenAI, and Anthropic alone could account for 2.9% of the weight in the S&P Global Index, nearly equivalent to the entire Canadian market. MSCI, an index provider, calculated in a February 2026 blog post the impact of the top 10 private companies going public (predicting a SpaceX valuation of only $800 billion at the time, though the general point remains valid): With a 5% free float, only 4 companies could be included; with a 10% float, 7 could be included. MSCI found that even with a 25% float calculation, the capital flows forced by index fund rebalancing would be enormous: Newly listed companies would attract tens of billions in inflows, while the largest existing listed companies would face tens of billions in outflows. 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 get the offering price. They can only buy after the public market rally, and subsequent performance is typically abysmal.

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

A 2019 study by Dimensional Fund Advisors (DFA) analyzed the first-year secondary market performance of over 6,000 IPOs between 1991 and 2018. It found that the IPO portfolio underperformed the broader market and small-cap indices by approximately 2% annually. The only exception was during the 1992-2000 internet bubble, when small-cap tech IPOs skyrocketed, but the subsequent crash is well known. The study notes that IPO stocks exhibit characteristics similar to "small, high-growth expectations, low-profit margins, aggressive expansion" stocks, often termed "small-cap garbage growth stocks," which are highly volatile and consistently lag behind the market over the long term.

This is also confirmed by IPO-focused ETF products. 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. The IPO return database compiled by IPO expert Jay Ritter shows that from 1980 to 2023, IPO stocks bought on the secondary market and held for three years underperformed the broader market by an average of 19 percentage points.

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

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

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

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

Market-cap-weighted indices must adjust 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 stocks for listing when valuations are extremely high and buy back shares when valuations are low. Consequently, index funds, in their effort to track the index, are forced to buy high and sell low.

A 2025 paper estimates that this passive timing due to index rebalancing results in a performance drag of 47 to 70 basis points (0.47% - 0.70%) per year on a portfolio.

Given that companies are staying private longer, should average investors try to access private companies before their IPOs? Several serious issues exist:

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

Extremely High Implicit Fees: The fees and costs associated with private company investments can often eat up any returns from holding them. The Wall Street Journal reported that a Special Purpose Vehicle (SPV) designed to purchase SpaceX shares charged upfront fees of up to 4% and an additional 25% cut of future profits. Furthermore, there are risks of opaque ownership due to complex structures, as well as outright fraud.

Liquidity Crunch and Unusual Losses: Unless you are an insider, the financial intermediaries with access to private stock will not simply hand you a windfall. For example, the ERSShares Private-Public Crossover ETF (XOVR) bought SpaceX shares via an SPV in December 2024. Despite a subsequent significant valuation increase for SpaceX, the ETF faced real-world problems because it was a liquid ETF holding a large amount of illiquid assets due to the SPV's lack of liquidity. The result was that the fund not only lost value in absolute terms but also significantly underperformed the broader market.

As Jeff Ptak, director at Morningstar, pointed out: "In investing, the more you desire something, the more you should probably question your initial urge to own it." Investors were too eager for a piece of the action, which in this case backfired.

For index fund investors, mega-IPOs will inevitably impact market indices and the funds that track them, especially when these companies are given "fast track" access. Due to their operational mechanism, index funds will blindly buy these IPO stocks at any price, and the massive buy orders can even further inflate the purchase cost.

If you are an index fund investor, this is a hidden cost you have been paying, or perhaps a part of the index investing life that must be accepted. You can choose to endure it and accept it, or you can look for alternative products that do not blindly automatically buy IPO stocks. Finally, it is nearly impossible for ordinary individuals to get shares of these scarce private companies before the IPO; when everyone is scrambling to buy, their high price or high barrier to entry will consume most of the expected gains.