SpaceX and OpenAI: The Mega IPO Grift

0:00 Some massive companies are set to go

0:01 public very soon.

0:02 Private companies like SpaceX, OpenAI and Anthropic would rank

0:06 among the largest companies if they went

0:08 public and index funds would be forced

0:10 to buy their stock.

0:12 That means that if

0:12 you are an index fund investor, you may

0:14 soon be investing in these companies

0:16 whether you like it or not.

0:18 The problem is that most IPOs are terrible

0:20 investments and these ones in particular

0:23 raise some questions.

0:24 I'm Ben Felix, chief investment officer at PWL Capital,

0:27 and I'm going to tell you what the

0:28 upcoming mega IPOs mean for you and your

0:31 portfolio.

0:36 In this video, I'm going to take you

0:37 through how stock indices and the index

0:40 funds tracking them include IPOs, how

0:42 this might affect index fund returns,

0:44 and what you can do about it.

0:46 I'll also cover whether index fund investors are

0:48 missing out on private market returns,

0:50 which is a common perception based on

0:53 companies staying private longer.

0:55 Index funds are generally great investments

0:57 because they roughly deliver the returns

0:59 that the public stock market has to

1:00 offer.

1:01 Since their primary role is

1:03 representing the stock market, some

1:05 stock indices aim to include new IPOs

1:08 soon after the company goes public.

1:10 This makes sense for the purpose of

1:12 representing the public stock market.

1:14 But the problem for index fund investors

1:16 is that IPOs have had historically

1:19 terrible returns.

1:20 I'll come back to that

1:20 point later.

1:21 Index funds today control

1:23 trillions of dollars.

1:24 So, if you're a

1:25 new company listing on the stock market

1:27 or an investment bank facilitating an

1:29 IPO, getting the stock included in a

1:32 major index or multiple indices can mean

1:34 huge investment dollars flowing into its

1:37 shares on the public market as index

1:39 funds are forced to buy, giving sellers

1:41 liquidity and pushing up the share

1:43 price.

1:44 This makes index inclusion very

1:47 desirable for shareholders of the newly

1:49 listed company, but probably not so much

1:51 for the index fund investors who are

1:53 left holding the bag.

1:55 And it is often a

1:56 bag that they are left holding.

1:58 Companies tend to go public when they

1:59 think they can sell their stock at a

2:01 high price.

2:02 Meaning, the moment you can

2:03 buy their stock on the secondary market

2:05 is precisely when the insiders believe

2:07 it's overvalued or at least nicely

2:10 valued.

2:10 If you're an investor, you

2:12 probably don't want to buy an overpriced

2:14 stock, but index funds don't have that

2:16 kind of discretion.

2:17 They're forced to gobble up whatever is included in the

2:20 index, regardless of its price.

2:22 The IPO inclusion rules vary across indices.

2:24 For example, as of right now, the S&P 500

2:27 requires a stock to have been trading on

2:29 a public exchange for 12 months before

2:32 inclusion, while the S&P total market

2:34 index allows for inclusion within 5 days

2:36 for stocks that meet certain criteria.

2:38 This is called fasttrack entry which is

2:40 important to understand.

2:41 Basically stocks that meet certain criteria can be

2:45 eligible for near immediate inclusion in

2:47 some total market indices.

2:49 As I mentioned, the S&P 500 has historically

2:52 required shares to trade for a year

2:54 before inclusion.

2:55 But as reported by

2:56 Bloomberg, S&P may be considering an S&P

2:58 500 rule change to accelerate the

3:01 inclusion of mega IPOs like SpaceX.

3:04 NASDAQ is considering similar changes

3:06 for the NASDAQ 100 to accelerate

3:08 inclusion.

3:08 The implications here for

3:10 index fund investors are important.

3:12 A 2025 paper looks at how fast track entry

3:15 into Crisp, that Center for Research and

3:17 Security Prices Indices affects stock

3:20 returns and IPO deal structure.

3:22 VTI, for example, a large ETF, tracks the CRISP

3:26 US total market index.

3:27 Crisp adds eligible securities to the index within

3:30 as few as 5 days for fasttrack entry.

3:33 The authors of this paper show that

3:35 expected index investor demand for IPO

3:37 shares causes FastTrack IPOs to

3:40 outperform their non-fastrack counterparts by over 5 percentage points

3:44 following their listing.

3:45 This outperformance peaks at the index

3:47 inclusion date and reverts significantly

3:49 within two weeks thereafter.

3:51 Basically, index funds are being frontr run by

3:53 intermediaries like hedge funds who know

3:56 that index funds are going to be buying

3:58 the shares once they become eligible for

4:00 index inclusion and then the index funds

4:02 end up holding the shares as they revert

4:04 back down closer to their IPO price.

4:07 The authors call this a shadow tax largely

4:09 paid by index fund investors.

4:11 It's like ticket scalpers for concerts and sports

4:13 events.

4:14 Another important index definition that's proving to be relevant

4:16 to mega IPOs is the concept of free

4:19 float.

4:19 Free float is the proportion of a

4:21 company's shares that are available for

4:22 purchase in the public equity market.

4:24 Most major indices have a minimum float

4:26 requirement and weight stocks by their

4:29 public float.

4:30 A company could go public

4:31 while only making a small portion of

4:33 their overall market capitalization

4:34 freely available on the public exchange.

4:36 This would be referred to as a lowflat

4:39 IPO.

4:40 As reported by the Financial Times,

4:42 SpaceX plans to float less than 5% of

4:44 its equity, much lower than the average

4:46 IPO.

4:47 With a$ 1.75 trillion valuation,

4:50 but only a 5% public float, most indices

4:53 would weight it at its float of 88

4:55 billion, and many would actually exclude

4:57 it altogether.

4:58 NASDAQ currently has a

4:59 10% minimum float and weight stocks

5:01 based on the value of all listed shares

5:03 of the company with no regard for free

5:05 free float, which is unique.

5:07 But they recently approved rule changes following

5:09 a public consultation to speed up IPO

5:11 inclusion, eliminate the lowflat cutoff,

5:13 and introduce a float factor in their

5:16 waiting of lowflat stocks.

5:17 The cynical view on this is that NASDAQ is changing

5:21 the NASDAQ 100 index rules to win SpaceX

5:24 over in an effort to get their listing

5:26 on the NASDAQ exchange.

5:28 including in the index would force significant index fund

5:31 buying, which likely ends up being good

5:33 for SpaceX, its early investors, and

5:36 NASDAQ, but potentially comes at the

5:38 expense of NASDAQ 100 index fund

5:41 investors.

5:42 Some indices like the crisp

5:43 US total market index tracked by VTI

5:46 continue to have a low float cutoff of

5:48 10% for fasttrack entry into the index.

5:51 Between inclusion criteria and index

5:53 waiting methodologies, there's some

5:55 uncertainty about how these mega IPOs

5:57 will initially show up in indices.

5:59 But there's no question that their listings

6:01 will change the public market over time.

6:03 That's likely why index providers are

6:05 considering making changes to get these

6:07 companies represented in their indices.

6:09 To reiterate a point from earlier,

6:11 indices are meant to represent the stock

6:13 market.

6:13 A blog post from index provider

6:15 S&P Global shows that just SpaceX,

6:17 OpenAI, and Anthropic would make up 2.9%

6:20 of the S&P World Index at their full

6:23 market caps.

6:24 That's almost as much as

6:25 Canada.

6:26 But these numbers assume that

6:27 the total market cap of the companies is

6:29 included in the index.

6:30 Since many of these IPOs are expected to have low

6:32 public floats, that should be accounted

6:34 for in estimating their market impact.

6:36 In another blog post, index provider

6:38 MSCI calculated the potential changes to

6:40 the MSCI allcountry world investable

6:43 market index in the event of some of the

6:45 largest private companies going public

6:47 in 2026.

6:48 This was written back in

6:50 February 2026 when SpaceX had a quaint

6:53 valuation of only 800 billion, but the

6:56 general points are still relevant.

6:58 They ask in the blog post what would happen

6:59 to the index to this world index if the

7:02 10 largest companies from the Msei all

7:05 country venturebacked private company

7:07 index went public.

7:09 Since the free float

7:10 at the time of listing is unknown, they

7:12 go through a few scenarios.

7:13 At a 5% float, only four of the 10 large private

7:16 companies would achieve index inclusion

7:18 based on MSCI's inclusion rules.

7:20 At a 10% float, seven of the 10 companies

7:23 would achieve index inclusion, but not

7:25 at enormous weights in the index.

7:27 While the overall market weight changes in

7:29 percentage terms would not be huge, even

7:31 at a 25% float scenario, MSEI finds that

7:34 the dollar flows just for funds tracking

7:36 MSCI indices would be huge with newly

7:39 listed private companies receiving

7:41 billions in investor dollars and the

7:43 largest existing public companies seeing

7:45 billions in outflows.

7:47 These flows are what ultimately matter to index fund

7:49 investors who are being forced to buy

7:51 shares.

7:52 Okay, so index funds, depending

7:54 on the rules of the specific indices

7:56 they track, may or may not invest in

7:58 these mega IPOs.

7:59 And even if they do, it

8:00 will likely be at a weight reflecting

8:02 their public float, except for the

8:04 NASDAQ 100, which as of recently would

8:06 use its newly adopted float factor.

8:09 An important piece of understanding this

8:10 whole situation is the empirical fact

8:12 that investing in IPOs is one of the

8:15 worst investment strategies that exists.

8:17 Before I get to that though, make sure

8:19 to subscribe if you haven't already.

8:20 I make nerdy research-driven videos to

8:22 help you make more informed financial

8:24 decisions.

8:24 Okay, IPOs tend to have a

8:26 first day pop where the price on the

8:29 public market jumps up relative to the

8:31 IPO price, but most investors don't get

8:33 the IPO price.

8:34 Investing in the shares

8:35 once they are listed on the public

8:37 market, so after the pop has been rough

8:40 to say the least.

8:41 The consistent pattern of IPO underperformance even has a name.

8:44 It's the new issues puzzle coined in a

8:46 highly cited 1995 paper which found that

8:49 companies issuing stock from 1970 to

8:51 1990 tended to be poor investments.

8:54 The paper finds that investors in IPOs

8:56 receive average returns of only 5% per

8:58 year while similar listed firms returned

9:01 12% over the same period.

9:03 The paper notes that to achieve the same wealth 5

9:05 years later, an investor would have had

9:07 to put 44% more money into the new

9:10 issues in the sample than into

9:12 established firms of the same size.

9:14 A more recent 2019 study from Dimensional

9:16 Fund Advisors looked at the first year

9:18 secondary market performance of more

9:20 than 6,000 IPOs from 1991 to 2018 and

9:24 found that a portfolio of IPOs generally

9:26 underperformed the market and a small

9:27 cap index by about 2% per year.

9:30 The main exception to this finding was in the

9:32 1992 to 2000 period when the IPO

9:34 portfolio outperformed the small gap

9:36 index by about 1.1% annually mainly due

9:39 to IPOs consisting of small tech

9:42 companies that took off in the dotcom

9:44 boom and uh I mean we all know what

9:47 happened after that.

9:48 The study found that these poor returns were largely

9:50 explained by the factors in the FM and

9:52 French five factor asset pricing model.

9:54 The IPO portfolio behaves like a

9:56 portfolio of small growth,

9:58 lowprofitability, high investment stocks, also known as junk or small crap

10:02 growth.

10:03 These types of stocks are more

10:05 volatile and tend to lag behind the

10:06 broader market.

10:07 We don't even need these

10:08 papers though.

10:08 These findings are easy

10:09 for anyone to replicate and update today

10:12 because of course there is an ETF for

10:14 IPOs.

10:15 The Renaissance IPO ETF

10:17 exclusively invests in large US IPOs

10:20 when they list and then sells the shares

10:23 after they've been public for three

10:24 years.

10:25 It has underperformed VTI which

10:27 tracks the total US market by more than

10:30 six percentage points annualized since

10:32 inception in October 2013.

10:34 And as expected, it behaves like a portfolio of

10:38 small stocks with high prices, low

10:40 profitability, and aggressive asset

10:42 growth.

10:43 Similar results can be found

10:44 internationally since 2014 with the

10:47 Renaissance International IPO ETF IPOS.

10:51 Yes, that is the real ticker.

10:53 Professor Jay Ritterder, co-author of the new

10:55 issues puzzle, maintains an up-to-date

10:57 database of IPO returns.

10:58 In that data spanning 1980 through 2023, the average

11:03 three-year buy and hold return for IPOs

11:05 purchased on the secondary market trails

11:08 the market by 19 percentage points.

11:10 Lowflat IPOs look particularly bad.

11:13 Remember, a lowflat IPO means that only

11:15 a small portion of the company's shares

11:17 are available for public trading, which

11:19 can amplify price swings because demand

11:21 is concentrated on a limited supply.

11:24 This is widely expected to be the

11:25 approach for companies like OpenAI and

11:28 SpaceX.

11:28 Lowflat IPOs for high revenue

11:31 companies are rare, but they're not

11:33 totally unheard of.

11:34 I reached out to

11:34 Professor Ritterder, a past guest on my

11:36 podcast, to see if he had any data on

11:39 large lowflat IPOs specifically.

11:42 He sent me this table, which you nerds are

11:44 getting an exclusive look at.

11:46 He found 11 lowflat, that is below 5% float IPOs

11:50 for companies with inflationadjusted

11:52 trailing 12-month sales of $100 million

11:56 or more going back to 1980.

11:58 10 of the 11

11:59 IPOs underperformed the market within

12:01 three years with average

12:03 underperformance of roughly 50% from the

12:05 offer price and over 60% from the first

12:08 day close suggesting that constrained to

12:11 supply may drive early price spikes but

12:14 tends to be followed by significant

12:16 underperformance.

12:17 He also mentioned that

12:18 these examples tended to have high price

12:20 to sales ratios at the time of IPO which

12:23 is very relevant for the current

12:25 potential mega IPOs.

12:27 If SpaceX were to

12:28 achieve a$ 1.75 trillion valuation, it

12:32 would have a price to sales ratio of

12:33 more than 100 times based on trailing

12:36 sales.

12:36 For context, the highest price to

12:39 sales ratio for an S&P 500 constituent

12:41 today is Palanteer's 73 times, while the

12:45 index as a whole trades at a price to

12:46 sales of 3.1 times.

12:49 In general, high valuations are associated with low

12:52 expected future returns.

12:53 For index fund investors, this problem is complicated.

12:56 When large private companies go public

12:58 with high valuations, they change the

13:00 landscape of the broader market.

13:02 In response, indices must rebalance to

13:05 remain reflective of the broader market.

13:07 Market cap weighted indices must

13:09 rebalance in response to stock market

13:11 composition changes, which in some cases

13:13 can include IPOs.

13:14 In doing so, index

13:16 funds implicitly engage in market

13:18 timing.

13:19 The problem is that it tends to

13:20 be really bad market timing.

13:23 Issuers, that's like companies listing on the

13:25 public market, will generally want to

13:27 issue stock when their valuation is

13:29 high, when when they believe their

13:31 valuation is high and buy it back when

13:33 their valuation is low.

13:35 Index funds in their effort to track the indices that

13:38 reflect the market end up buying high

13:41 and selling low.

13:42 The 2025 paper index

13:44 rebalancing and stock market

13:45 composition, do indexes time the market?

13:48 estimates that this timing ends up

13:50 creating a performance drag of between

13:52 47 and 70 basis points per year relative

13:55 to a delayed rebalancing approach.

13:58 In other words, there is a lasting negative

14:00 effect on your portfolio that could have

14:02 been avoided had your index fund

14:03 prioritized expected returns rather than

14:06 tracking error to its index.

14:08 Listen, I'm a huge fan of index funds, but this

14:12 issue right here is one of the reasons

14:13 that I don't use them personally or for

14:15 the clients of PWL Capital.

14:17 I use funds from Dimensional Fund Advisors, which

14:20 are a lot like index funds, but don't

14:21 track an index, and intentionally avoid

14:24 investing in IPOs for about a year after

14:26 the company lists.

14:27 They also intentionally tilt away from the junk

14:30 that IPOs tend to behave like more

14:32 generally.

14:32 To be clear, my firm PW

14:34 Capital does use Dimensional Funds, but

14:36 I was not paid by Dimensional or anyone

14:38 else to say this, and I gain nothing

14:41 from you using their products.

14:43 With companies staying private longer and

14:45 going public when they're larger, the

14:47 next question that is natural to ask is

14:49 whether investors should be seeking

14:50 exposure to private company shares

14:52 before they go public.

14:54 There are a couple of things to think about here.

14:56 There's a huge amount of survivorship

14:58 bias in private company outcomes.

15:00 For every SpaceX or Open Eye that we hear

15:02 about, there are thousands of companies

15:04 that did not grow or failed entirely.

15:07 This skewess exists in public markets

15:09 too, but it's even more brutal, even

15:11 more pronounced in private markets.

15:13 Additionally, the fees and costs

15:14 associated with private company

15:16 investments can often absorb the

15:17 financial benefits of owning them.

15:19 This has been true with private equity funds

15:21 in general, which have delivered net of

15:23 fee returns in line with public markets.

15:25 There are some wild stories floating

15:27 around right now about the lengths

15:28 people have gone to to buy what they

15:30 hope is exposure to companies like

15:32 SpaceX.

15:33 One specialurpose vehicle reported on by Wall Street Journal had a

15:37 4% upfront fee with an additional fee of

15:40 25% of future profits.

15:42 There are also questions about who owns what due to the

15:44 complicated structures.

15:45 And of course, there are stories of outright fraud.

15:48 I think people imagine all the money they

15:50 will make if they can buy some SpaceX

15:52 shares at a low valuation and then sell

15:54 when it goes public.

15:56 But unless you're an employee or otherwise have direct

15:58 access to the company's shares,

16:00 financial intermediaries that do have

16:02 access are not typically going to give

16:04 you access to the equity on terms that

16:07 are better for you than they are for the

16:09 intermediary.

16:10 Financial intermediaries don't tend to be in the business of

16:13 giving you money for free.

16:15 Some ETFs have gotten exposure to SpaceX shares

16:17 either directly or through specialurpose

16:19 vehicles.

16:20 One example that has attracted

16:21 a lot of attention is the ERS shares

16:23 private public crossover ETF.

16:26 It bought into SpaceX through an SPV in December

16:28 2024.

16:29 SPVS are not particularly liquid.

16:31 So, this ETF has had to deal with some

16:33 unique practical issues as a liquid ETF

16:36 holding a large stake in an illlquid

16:38 asset.

16:39 But even more interesting to me

16:40 at least is that despite SpaceX

16:43 reportedly rising in value substantially

16:45 since this ETF invested in it back in

16:47 December 2024, the fund has lost money

16:50 in absolute terms and even more so

16:52 relative to the market.

16:54 There are multiple reasons for this and it gets

16:55 complicated quickly and that's part of

16:57 the problem.

16:58 As Jeff Tac, managing

16:59 director for Morning Star Research

17:00 Services, widely noted in his analysis

17:03 of XOVR, when it comes to investing, the

17:06 more you covet something, the more you

17:07 should probably question your desire to

17:09 own it in the first place.

17:11 Investors are so eager to get a piece of SpaceX that,

17:14 at least in this case, they got burned.

17:16 Some good news is that while it's

17:17 generally difficult to get access to the

17:19 private company shares that you really

17:20 want, a lot of public companies make

17:23 strategic investments into private

17:24 companies.

17:25 Public market investors are

17:26 not entirely locked out of private

17:28 markets.

17:29 Okay.

17:29 What does all this mean

17:30 for you, the index fund investor?

17:33 Yes, it's possible that these upcoming mega

17:36 IPOs will affect market indices and the

17:38 index funds tracking them, especially if

17:40 these companies are fasttracked for

17:42 index inclusion.

17:44 Due to index fund

17:45 mechanics, index funds will buy up IPO

17:48 shares that are included in the index at

17:50 any price, leading to adverse selection

17:53 and potentially even making the problem

17:55 worse for themselves as they bid the

17:57 price of the stocks up.

17:58 If you're an index fund investor already, this is a

18:01 cost you have been paying an implicit

18:04 cost.

18:04 Maybe these cases are a bit more

18:06 extreme, but this is part of the

18:07 indexing lifestyle.

18:09 You can either accept it and carry on or look at

18:11 alternatives like dimensional funds that

18:13 are similarly lowcost and broadly

18:15 diversified but don't auto invest in

18:17 IPOs.

18:18 No, you probably can't get access

18:19 to these private company shares prior to

18:21 their IPOs.

18:23 When everyone wants to buy

18:24 something, either its price or the cost

18:26 of accessing it will absorb a huge

18:28 portion of the benefit you think you're

18:30 going to get from investing in it.

18:32 If you're interested in learning more about

18:33 how poorly IPOs perform, click here.

18:36 Or if you're interested in learning about

18:37 why PWL Capital uses dimensional funds

18:40 to construct client portfolios, you can

18:41 click right here.