SpaceX and OpenAI: The Mega IPO Grift

Key Concepts

• Mega IPOs: Initial Public Offerings of massive private companies (e.g., SpaceX, OpenAI, Anthropic).
• Index Inclusion: The process by which an index (like the S&P 500 or NASDAQ 100) adds a stock, forcing index funds to purchase shares.
• Fast-Track Entry: Rules allowing near-immediate inclusion of new stocks into indices, often within 5 days.
• Free Float: The proportion of a company’s shares available for public trading.
• New Issues Puzzle: The empirical observation that IPOs historically underperform the broader market.
• Shadow Tax: The performance drag caused by index funds being "front-run" by intermediaries who anticipate index-driven demand.
• Low-Float IPO: An IPO where only a small percentage of total equity is made available to the public, often leading to extreme price volatility.

1. The Mechanics of Index Inclusion and "Shadow Tax"

Index funds are designed to track market performance, but their rigid rules create vulnerabilities. When a company goes public, index providers may use "fast-track" rules to include the stock quickly.

• The Problem: Because index funds are mandated to buy these stocks regardless of price, they become "forced buyers."
• The Shadow Tax: Research indicates that hedge funds and other intermediaries "front-run" index funds, buying shares early and selling them to the funds once they are added to the index. This causes the stock price to spike at inclusion and revert shortly after, leaving index fund investors holding the bag. A 2025 study found this creates a performance drag of 47–70 basis points annually.

2. The "New Issues Puzzle" and IPO Performance

Historical data consistently shows that IPOs are poor long-term investments.

• Underperformance: A 1995 study (the "New Issues Puzzle") found that IPOs returned only 5% annually compared to 12% for established firms. A 2019 Dimensional Fund Advisors study confirmed that IPOs underperform the market by ~2% per year.
• The Renaissance IPO ETF: Since its 2013 inception, this ETF (which tracks large IPOs) has underperformed the total market (VTI) by over 6% annualized.
• Low-Float Risks: Professor Jay Ritter’s data on 11 "low-float" IPOs (under 5% float) showed that 10 underperformed the market by an average of 50% within three years. These companies often trade at extreme price-to-sales ratios (e.g., SpaceX’s potential 100x ratio vs. the S&P 500 average of 3.1x).

3. Regulatory and Index Provider Shifts

There is a trend toward changing index rules to accommodate mega-cap private companies:

• NASDAQ 100: Recently approved rule changes to speed up IPO inclusion and introduce a "float factor" for weighting, which critics argue is a move to attract companies like SpaceX to the NASDAQ exchange.
• S&P 500: Bloomberg reports that S&P is considering accelerating inclusion rules for mega-cap IPOs.
• Market Impact: If SpaceX, OpenAI, and Anthropic were included at full market cap, they could represent nearly 2.9% of the S&P World Index—a weight comparable to the entire Canadian market.

4. The Myth of Private Market Access

Many investors believe they are "missing out" by not owning private shares. However, the reality is often different:

• Survivorship Bias: Private markets are highly skewed; for every success like SpaceX, thousands of companies fail.
• Fee Structures: Intermediaries (SPVs) often charge exorbitant fees (e.g., 4% upfront + 25% of profits), which erode potential gains.
• Case Study (XOVR ETF): The ERS Shares Private Public Crossover ETF, which invested in SpaceX via an SPV, lost money in absolute terms despite the reported rise in SpaceX’s valuation, illustrating the liquidity and structural risks of these vehicles.

5. Strategic Alternatives

Ben Felix argues that while index funds are generally excellent, they are susceptible to the "forced buying" of overpriced IPOs.

• Methodology: His firm, PWL Capital, utilizes funds (specifically Dimensional Fund Advisors) that avoid IPOs for the first year and tilt away from "junk" stocks (small, low-profitability, high-growth companies).
• Actionable Insight: Investors should be wary of the "fear of missing out" regarding private companies. If an investment is highly coveted, the price or the cost of access usually absorbs the expected benefit.

Conclusion

The upcoming mega IPOs represent a significant shift in market composition. While index funds are a low-cost, effective tool for most, they are structurally forced to participate in the "new issues puzzle" by buying potentially overvalued IPOs. Investors should recognize that index inclusion is not a stamp of quality, but rather a mechanical process that can lead to adverse selection. For those seeking to avoid this "shadow tax," alternatives that prioritize expected returns over strict index tracking may be preferable.