Source: Ben Felix Podcast

Compiled by: Felix, PANews

Editor's Note: Recently, Elon Musk's SpaceX secretly filed for an IPO with the U.S. Securities and Exchange Commission (SEC), aiming to go public as early as June. The company plans to raise $50-75 billion, targeting a valuation of approximately $1.75 trillion, potentially becoming the largest IPO in history.

Amidst the market jubilation, some have pointed out that such mega-IPOs are a "disaster" for retail investors, especially those investing in index funds. Ben Felix, Chief Investment Officer of PWL Capital, recently stated on a podcast that mega-IPOs like SpaceX and OpenAI are elaborate "scams," and shared his insights on what upcoming mega-IPOs mean for retail investors and their portfolios.

PANews has compiled the highlights of the podcast; the following are the details.

If private companies like SpaceX, OpenAI, and Anthropic were to go public, they would join the ranks of the world's largest companies. For index fund investors, this means that regardless of whether they are bullish on these companies, their funds would be forced to buy their shares.

The original intention of index funds was to perfectly replicate the performance of the public stock market. To get as close to the market as possible, many index compilation rules require companies to be included as soon as possible after their IPO. From a macroeconomic representativeness perspective, this is understandable, but from an investment return perspective, historical data shows that blindly buying IPO stocks often yields dismal results.

Today, index funds control trillions of dollars in funds. When a newly listed stock is included in a major index, it means a huge influx of money 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 the shareholders of newly listed companies (such as insiders and early investors), but not so for index fund investors who are forced to become the "bagholders."

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

Different indices have different rules for including IPOs. For example, the current S&P 500 index requires stocks to have been traded on a public exchange for at least 12 months before they can be included; while the S&P All Markets index allows stocks that meet certain criteria to be included within just 5 days of listing, a process known as "fast-track admission".

According to Bloomberg, S&P is considering revising the rules of the S&P 500 index to expedite the inclusion of mega-IPOs such as SpaceX; Nasdaq is also considering similar adjustments to the Nasdaq 100 index.

A 2025 paper examined the impact of "fast-track" CRSP (Comprehensive Ranking Service) US All Market Index (tracked by large ETFs like VTI, with inclusion as fast as 5 days) on stock returns. The authors found that IPOs using the "fast-track" route tended to outperform non-fast-track IPOs by more than 5 percentage points after listing, due to anticipated mandatory buying by index investors. However, this outperformance peaked on the index inclusion date and then declined sharply in the following two weeks. Essentially, index funds were being "front-run" by intermediaries like hedge funds, who knew that once a stock met the inclusion criteria, index funds would buy it and then hold it until the price fell back to near its IPO price. The authors termed this a high "hidden tax" paid by index fund investors, comparing these intermediaries to scalpers reselling concert tickets.

Another important concept associated with mega-IPOs is "free float," which is the percentage of a company's shares available for purchase on the open market. Most major indices have minimum free float requirements and determine stock weights based on free float. Some companies release only a very small fraction of their total market capitalization when they go public; this is known as a "low-free float IPO."

According to the Financial Times, SpaceX plans to have less than 5% of its shares outstanding, far below the average. Even with a valuation of $1.75 trillion, with only 5% of its shares outstanding, most indices would only assign it a weighting of $88 billion, and many would exclude it altogether. Nasdaq previously had a minimum outstanding share requirement of 10%, but after recent public consultation, they approved rule changes that not only accelerated IPO approval but also eliminated the lower threshold for low outstanding shares.

One pessimistic view is that Nasdaq changed the rules of 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 heavily. This would be good news for SpaceX, its early investors, and Nasdaq, but this cost is very likely to be borne by Nasdaq 100 index investors.

Despite differences in index compilation, there is no doubt that these mega-IPOs will reshape the public market landscape. A blog post from S&P Global points out that SpaceX, OpenAI, and Anthropic alone could account for 2.9% of the S&P Global Index's weighting, almost equivalent to the entire Canadian market. In a February 2026 blog post, MSCI, the index provider, calculated the impact of the top 10 private equity firms listing (at that time, SpaceX's valuation was predicted to be only $800 billion, but the overall view remains applicable): with 5% free float, only 4 companies would be included; with 10% free float, 7 would be included. MSCI found that even with 25% free float, the forced adjustments to index funds would result in massive capital flows: new listings would attract billions of dollars in inflows, while the largest existing listed companies would experience billions of dollars in outflows. These forced buying flows ultimately affect the interests of index fund investors.

The key fact to understanding this phenomenon is that investing in IPOs is one of the worst investment strategies available. While IPOs typically see a surge on the first day of trading, most investors don't even get the offering price and end up buying in after the initial price spike, resulting in disastrous subsequent performance.

This poor IPO performance even has a specific term: the "IPO puzzle," first proposed in a 1995 paper. That paper found that the average annual return on IPOs between 1970 and 1990 was only 5%, while the return on similar-sized listed companies during the same period was 12%. To achieve the same return five years later, investors would need to invest 44% more in IPOs.

A 2019 study by Dimensional Fund Advisors (DFA) analyzed the performance of over 6,000 IPOs in their first year on the secondary market between 1991 and 2018, finding that IPO portfolios underperformed the broader market and small-cap indices by approximately 2% annually. The sole exception was during the dot-com bubble of 1992-2000, when small-cap tech IPOs surged, but the subsequent crash is well-known. The study noted that IPO stocks exhibit characteristics similar to "small-cap, high-growth-expectations, low-margin, aggressively expanding" stocks, often referred to as small-cap junk growth stocks, which are highly volatile and consistently underperform the broader market.

This is also evidenced by ETFs that focus on IPOs. The Renaissance IPO ETF, which invests specifically in large-cap U.S. IPOs, has underperformed the VTI (Vancouver National Equities ETF) by more than 6 percentage points in annualized returns since its inception in October 2013. An IPO return database compiled by IPO expert Jay Ritter shows that between 1980 and 2023, IPO stocks bought and held for three years in the secondary market underperformed the market by an average of 19 percentage points.

IPOs with low float performed even worse, because the limited supply of shares available for trading meant that concentrated demand could severely amplify price volatility. This is precisely the listing method widely expected to be adopted by OpenAI and SpaceX.

Data shared by Ritter shows that since 1980, only 11 low-float (i.e., less than 5% of shares outstanding) IPOs have been successful, and these companies had inflation-adjusted sales of $100 million or more over the past 12 months. Of these, 10 underperformed the market within three years, averaging about 50% behind their offering price and over 60% behind their first-day closing price. This suggests that limited supply can indeed drive early price spikes, but is often followed by significant underperformance compared to the market.

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

Generally speaking, high valuations are often associated with lower expected future returns. For index fund investors, the issue is more complex. When large private companies go public at high valuations, they alter the landscape of the broader market. In response, indices must be recalibrated to reflect the wider market.

Market capitalization-weighted indices must be rebalanced to reflect changes in market composition, meaning index funds implicitly participate in "market timing." The problem is that this is often very poor market timing. Companies tend to go public when valuations are extremely high and then buy back shares when valuations are low. Therefore, index funds, in their efforts to track the index, are ultimately forced to buy high and sell low.

A 2025 paper estimated that this passive timing due to index rebalancing would drag down portfolio performance by 47 to 70 basis points (0.47% - 0.70%) annually.

Given that companies are spending increasingly longer periods before going public, should ordinary investors try to find opportunities to invest in private equity firms before the IPO? Several serious questions arise here:

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

Extremely high hidden costs : The fees and costs associated with private equity investments often eat up the returns on holding them. The Wall Street Journal has reported that a special purpose vehicle (SPV) designed to purchase SpaceX shares charged up to 4% upfront fees and an additional 25% cut of future profits. Furthermore, there are risks of unclear ownership due to complex structures, and even outright fraud.

Liquidity Shortages and Abnormal Losses : Unless you're an insider, financial intermediaries that control private equity channels will never hand you a free lunch. For example, the ERSShares Private-Public Crossover ETF (XOVR) bought SpaceX through an SPV in December 2024. Although SpaceX's valuation subsequently surged, the ETF faced a series of practical problems as a liquid ETF holding a large amount of illiquid assets due to the SPV's lack of liquidity. As a result, the fund not only lost money in absolute terms but also significantly underperformed the market.

As Jeff Ptak, a director at Morningstar, pointed out, "In investing, the more you crave something, the more you should question your initial desire to have it." In this case, the investor's eagerness to get a piece of the pie backfired spectacularly.

For index fund investors, mega-IPOs will inevitably impact market indices and the funds that track them, especially when these companies are granted "fast-track access." Due to their operating mechanism, index funds will blindly buy these IPO stocks at any price, and the massive buying pressure may even further drive up the cost of purchasing the stocks.

If you're an index fund investor, this is a hidden cost you've been paying, or rather, an unavoidable part of index investing. You can choose to continue tolerating it, or you can look for alternatives that don't blindly and automatically buy IPO stocks. Ultimately, it's almost impossible for ordinary people to obtain these scarce private company shares before their IPO; when everyone is scrambling to buy, the high price or barrier to entry will inevitably eat up most of your expected returns.

Related reading: ARK Insider Guide: Is SpaceX's $1.75 trillion valuation really worth it?