Source: Ben Felix Podcast

Compiled by: Felix, PANews

Editor's note: Recently, SpaceX, under Elon Musk, has secretly submitted IPO registration documents to the U.S. SEC, aiming to go public as early as June. The company plans to raise $50 to $75 billion, targeting a valuation of about $1.75 trillion, which could become the largest IPO in history.

However, amidst the market's excitement, some individuals point out that such super IPOs are a "disaster" for retail investors, especially for those invested in index funds. PWL Capital's Chief Investment Officer Ben Felix recently stated in a podcast that super IPOs like SpaceX and OpenAI are a carefully designed "scam," sharing what the upcoming super IPOs mean for retail investors and their portfolios.

PANews has compiled the highlights from the podcast; below are the content details.

If private companies like SpaceX, OpenAI, and Anthropic go public, they will rank among the largest companies globally. For index fund investors, this means that regardless of whether you believe in these companies, your funds will be compelled to buy their stocks.

The original goal of index funds is to perfectly replicate the performance of the public stock market. To closely align with the market, many indexing rules require that newly listed companies be included as soon as possible after their IPO. From the macro-representativeness perspective, this is understandable, but from an investment return standpoint, historical data shows that blindly buying IPO stocks often leads to dismal returns.

Today, index funds control trillions of dollars, and when a new stock is added to a major index, it signifies a massive influx of funds into that stock. Because index funds are forced to buy, this provides sufficient liquidity for sellers and drives up the stock prices. This is highly beneficial for shareholders of newly listed companies (such as insiders and early investors), but it is not the same for index fund investors who have to become the "greater fool."

Companies typically prefer to go public when they believe they can sell at a high price. This means that when ordinary investors can finally purchase the stock in the secondary market, it is precisely when company insiders believe the stock is overvalued or overpriced. Investors generally do not want to buy overvalued stocks, but index funds do not have that discretion. No matter how the stock price moves, they must buy any stocks included in the index.

Different indices have varying rules for including IPOs. For example, the current S&P 500 index requires a stock to have been publicly traded for 12 months before it can be included; however, the S&P Total Market Index allows stocks that meet specific conditions to be included merely 5 days after listing, known as "fast-track admission."

According to Bloomberg, S&P is considering modifying the S&P 500 index rules to expedite the inclusion of super IPOs like SpaceX; NASDAQ is also contemplating similar adjustments to the NASDAQ 100 index.

A paper published in 2025 studied the impact of "fast-track admission" to the CRSP U.S. Total Market Index (tracked by large ETFs like VTI, typically added within 5 days) on stock returns. The authors found that due to anticipated forced buying by index investors, IPOs taking the "fast-track" route typically outperform non-fast-track IPOs by over 5 percentage points post-listing. However, this excess performance peaks on the index inclusion day and significantly drops within the next two weeks. Essentially, index funds are being "front-run" by intermediaries like hedge funds that know once a stock meets the criteria for index inclusion, index funds will buy those stocks, then when the stock price falls back close to its IPO price, index funds will continue holding them. The authors refer to this as a costly "invisible tax" paid by index fund investors, with these intermediaries acting like ticket scalpers.

Another important concept related to super IPOs is "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 determine stock weights based on free float. Some companies release only a tiny fraction of their total market value at listing, which is referred to as a "low float IPO."

According to the Financial Times, SpaceX plans to have a free float of less than 5%, significantly below the average level. Even if its valuation reaches $1.75 trillion, with only 5% free float, most indices would assign it a weight of merely $88 billion; many indices would even exclude it altogether. NASDAQ originally had a 10% minimum free float requirement, but after a recent public consultation, they approved a rule change that not only expedited IPO admissions but also removed the minimum float threshold.

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

Despite differences in index composition, there is no doubt these super IPOs will alter the landscape of the public market. A blog post by S&P Global pointed out that just SpaceX, OpenAI, and Anthropic could account for a 2.9% weight in the S&P Global Index, nearly equivalent to the entire Canadian market’s weight. In a blog post from February 2026, MSCI index providers estimated the impact of the IPOs of the top 10 private equity companies (at the time predicting SpaceX's valuation to be just $800 billion, but the overall view still applies): with 5% free float, only 4 companies could be included; at 10% free float, 7 could be included. MSCI found that even assuming a 25% free float, the forced adjustments from index funds led to massive cash flows: newly listed companies would attract billions of dollars, while the largest existing listed companies would face billions of dollars in capital outflows. These forced inflows and outflows ultimately affect the interests of index fund investors.

Understanding this phenomenon hinges on the core fact: investing in IPOs is one of the worst investment strategies available. While IPOs often see surges on the first day of trading, most investors are not able to purchase at the issue price and can only buy in after the public market surge, consequently suffering poor performance afterward.

This poor performance of IPOs even has a specialized term: "new issue puzzle," first proposed in a paper from 1995. The paper found that the average annual return of IPOs between 1970 and 1990 was merely 5%, while similar-sized existing companies returned 12% during the same period. To achieve the same return five years later, investors would need to invest 44% more in the IPO.

Dimensional Fund Advisors (DFA) conducted a study in 2019 on the performance of over 6,000 IPOs in their first year in the secondary market from 1991 to 2018, discovering that IPO portfolios lagged behind both the broader market and small-cap index by approximately 2% annually. The only exception was during the Internet bubble from 1992-2000, when small tech stock IPOs surged, but the subsequent crash is well-known. The study pointed out that IPO stocks exhibit characteristics similar to "small, high-growth expectations, low profitability, aggressive expansion" stocks, often referred to as small-cap growth stocks, which are highly volatile and underperform the broader market over the long term.

This is also evidenced in ETFs targeting IPOs. The Renaissance IPO ETF, which specifically invests in large U.S. IPOs, has underperformed the entire U.S. stock market ETF (VTI) by over 6 percentage points since its inception in October 2013. The IPO return database compiled by IPO expert Jay Ritter shows that from 1980 to 2023, buying and holding IPO stocks in the secondary market for three years averaged a 19 percentage point underperformance compared to the broader market.

Low float IPOs perform even worse, as the limited supply of tradable shares and concentrated demand can significantly amplify price volatility. This is what is widely expected for the listing strategy of OpenAI and SpaceX.

Data shared by Ritter shows that since 1980, only 11 low float (i.e., below 5% free float) IPOs have occurred, and these companies had inflation-adjusted sales of $100 million or more in the past 12 months. Of these, 10 IPOs underperformed the market within three years, averaging about a 50% decline from their issue price and over a 60% drop from their first-day closing price. This indicates that limited supply does drive initial price surges, but subsequently leads to significant underperformance compared to the market.

Moreover, these IPOs often have extremely high price-to-sales (P/S) ratios at listing. If SpaceX lists with a valuation of $1.75 trillion, its P/S ratio would exceed 100 times. In contrast, the highest P/S ratio in the current S&P 500 index, Palantir, stands at 73 times, with the overall average for the S&P index being only 3.1 times.

Overall, high valuations are typically associated with lower expected future returns. This issue is more complex for index fund investors. When large private companies go public at high valuations, they alter the dynamics of the broader market. In response, indices must readjust to maintain a reflection of the broader market.

Market-cap weighted indices must be rebalanced to reflect changes in market composition, meaning index funds are participating implicitly in "market timing." The problem is, this is often very poor market timing. Companies tend to issue stocks at extremely high valuations and repurchase stocks during downturns. Therefore, while index funds are trying to track the index, they are ultimately forced to buy high and sell low.

A paper from 2025 estimated that this passive market timing caused by index rebalancing results in an annual performance drag of 47 to 70 basis points (0.47% - 0.70%) on portfolios.

As companies spend longer periods prior to going public, should ordinary investors try to seek investment opportunities in private companies before IPO? Several significant issues exist here:

Survivor bias: For every SpaceX or OpenAI you hear about, there are thousands of failed or stagnant private companies. The survivor bias in the private market is far more brutal than in the public market.

Extremely high hidden costs: The associated fees and costs of investing in private companies often consume the returns from holding them. The Wall Street Journal reported that a special purpose vehicle (SPV) designed to purchase SpaceX shares charges up to 4% in front-end fees and takes an additional 25% of future profits as a cut. There are also risks of unclear ownership due to complex structures and pure fraud risks.

Liquidity exhaustion and anomalous losses: Unless you are an insider, financial intermediaries that have access to private stock opportunities will never give you free slices of pie. For instance, the ERS Shares Private-Public Crossover ETF (XOVR) bought into SpaceX via an SPV in December 2024. Despite SpaceX's subsequent valuation surge, the ETF faced a series of real issues due to the SPV's lack of liquidity, holding a lot of illiquid assets as a liquidity ETF. The result is that the fund not only lost in absolute value but significantly underperformed the market.

As Morningstar's director Jeff Ptak noted: “In investing, the more you crave something, the more you might need to question your initial desire to own it.” Investors are too eager to get a piece of the action, resulting in them getting burned in this case.

For index fund investors, super IPOs will inevitably impact market indices and the funds that track them, especially when these companies are given "fast-track access." Bound by their operating mechanisms, index funds will blindly buy these IPO stocks at any price point, and the large buying pressure may even further drive up the costs of acquiring these stocks.

If you are an index fund investor, this is a kind of hidden cost you have always been paying, or a part of the life of index-based investing that you must accept. You may choose to continue to endure and accept it, or you could look for alternatives that do not blindly buy IPO stocks. Ultimately, it is almost impossible for ordinary people to obtain shares of these scarce private companies before an IPO; when everyone is scrambling to get them, the high prices or barriers to access will inevitably consume most of the returns you expect to gain.

Related reading: ARK Internal Guide: Is SpaceX's $1.75 trillion Valuation Really Worth It?

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