If you invest in index funds, you may soon own shares of SpaceX, OpenAI, or Anthropic — whether you want to or not. That's because index funds are designed to automatically buy whatever stocks get added to the indices they track. And with some of the largest private companies in history eyeing public markets, the question of how IPOs affect index funds has never been more relevant. The short answer: index funds are structurally forced to buy new IPO shares regardless of price, and the historical track record of IPO returns is genuinely awful.
How Do IPOs Actually Affect Index Funds?
Index funds exist to represent the public stock market. When a company goes public and meets the criteria for index inclusion, funds tracking that index must purchase its shares to maintain accurate tracking. This sounds simple, but it creates a serious problem: index funds have no discretion over price.
Companies tend to go public precisely when insiders believe their stock is at a high — or even overvalued — price. The moment shares become available on the secondary market is often the moment insiders are most eager to sell. Index funds, bound by their mandate, step in as the forced buyer.
This dynamic becomes even more distorted at scale. Index funds today control trillions of dollars. When a major IPO is expected to qualify for index inclusion, intermediaries like hedge funds will buy shares first — knowing that index fund demand is coming — then sell into that demand once index funds are required to purchase. This practice, sometimes called front-running, means index fund investors often end up holding shares after prices have already been inflated.
A 2025 academic paper studied this exact phenomenon using CRSP indices (which underlie popular ETFs like VTI). It found that IPOs eligible for fast-track index entry — as few as five days after listing — outperformed non-fast-track IPOs by over five percentage points right around the index inclusion date. That sounds great until you see what comes next: that outperformance reverses sharply within two weeks. The authors call this a shadow tax on index fund investors.
What Is Index Fund Front-Running (The Shadow Tax)?
Think of it like ticket scalpers. Scalpers know a concert is going to sell out, so they buy tickets early and resell them at a premium to fans who have no other option. Hedge funds do something structurally similar with IPO stocks headed for index inclusion: they buy early, the index funds are forced to buy at elevated prices, and then prices drift back down.
A separate 2025 paper on index rebalancing found that this implicit market timing — where index funds buy new additions at high prices and sell removed stocks at low prices — creates a performance drag of between 47 and 70 basis points per year compared to a delayed rebalancing approach. That's a quiet but persistent tax on your returns, year after year.
Will SpaceX Join the S&P 500 or NASDAQ 100?
This depends heavily on the rules each index applies — and those rules are actively changing. Here's where things get interesting.
The S&P 500 has historically required a company to trade publicly for 12 months before inclusion. But Bloomberg has reported that S&P is considering rule changes to accelerate inclusion of mega IPOs like SpaceX.
The NASDAQ 100 has already approved rule changes: it eliminated its low-float cutoff, introduced a float factor for weighting low-float stocks, and moved to speed up IPO inclusion timelines. Critics have noted this looks like NASDAQ changing its own index rules to win SpaceX's listing on its exchange — a decision that would benefit SpaceX's early investors and NASDAQ itself, but potentially at the expense of NASDAQ 100 index fund holders.
Meanwhile, indices like the CRSP US Total Market Index (tracked by VTI) maintain a 10% minimum float for fast-track entry, which could exclude SpaceX if it lists with less than 10% of shares publicly available.
The bottom line: whether and how these companies end up in your index fund depends on which specific fund you own and how aggressively its underlying index pursues inclusion.
What Is a Low-Float IPO and Why Does It Matter?
Free float refers to the percentage of a company's total shares that are actually available to the public on the open market. Most index funds weight stocks by their public float, not their total market cap.
SpaceX is reportedly planning to float less than 5% of its equity. With a valuation around $1.75 trillion, that means roughly $88 billion worth of shares would be publicly available — a fraction of the company's total worth. Many indices would either significantly underweight SpaceX or exclude it entirely based on this low float.
Low-float IPOs are particularly dangerous for investors. When only a small slice of shares is publicly available, demand gets concentrated on limited supply, which can drive dramatic price spikes. But those spikes rarely hold.
Professor Jay Ritter, co-author of the landmark "new issues puzzle" paper, shared exclusive data showing that among 11 large low-float IPOs (below 5% float, with inflation-adjusted sales over $100 million) going back to 1980, 10 out of 11 underperformed the market within three years. Average underperformance was roughly 50% from the offer price and over 60% from the first-day close. These companies also tended to have very high price-to-sales ratios at IPO — exactly the profile expected for SpaceX, which at $1.75 trillion would carry a price-to-sales ratio exceeding 100x. For context, the entire S&P 500 trades at about 3.1x sales.
Are IPOs Bad Investments? The Data Is Brutal
The consistent underperformance of IPOs is so well-documented it has its own name: the new issues puzzle. A foundational 1995 paper found that IPO investors earned average returns of only 5% per year compared to 12% for similar established firms. To match the wealth created by investing in established companies, IPO investors would have needed to put in 44% more money upfront.
A 2019 Dimensional Fund Advisors study reviewed more than 6,000 IPOs from 1991 to 2018 and found that a portfolio of IPOs underperformed the market and a small-cap index by roughly 2% per year. The exception was the dot-com era — which, as history shows, didn't end well either.
You don't even need academic papers to see this. There's an ETF for it: the Renaissance IPO ETF invests in large US IPOs at listing and sells after three years. Since its October 2013 inception, it has underperformed VTI by more than six percentage points annualized. Professor Ritter's database, covering 1980 through 2023, shows the average three-year buy-and-hold return for IPOs purchased on the secondary market trails the market by 19 percentage points.
Can You Buy SpaceX Shares Before the IPO?
This is the question everyone is asking — and the answer is mostly: not without paying dearly for the privilege.
Some ETFs, like the ERShares Private-Public Crossover ETF (ticker: XOVR), have purchased SpaceX exposure through special purpose vehicles (SPVs). But SPVs are illiquid, carry high fees, and create complicated ownership structures. XOVR itself has lost money in absolute terms since investing in SpaceX via an SPV in December 2024 — despite SpaceX's reported valuation rising substantially in that time.
Private market access through intermediaries often comes with eye-watering costs. One SPV reportedly charged a 4% upfront fee plus 25% of future profits. When everyone wants a piece of the same asset, either the price or the access cost absorbs whatever gain you imagined.
As Morningstar's Jeff Tak put it: the more you covet something, the more you should probably question your desire to own it in the first place.
Some public companies do hold strategic investments in private firms, which offers indirect exposure without the intermediary fees. But direct pre-IPO access to the most coveted private companies typically favors insiders and employees — not retail investors.
Are Dimensional Funds Better Than Index Funds?
This whole situation is one reason to consider alternatives to traditional index funds. Dimensional Fund Advisors offers funds that are similarly low-cost and broadly diversified, but they don't track a specific index. This gives them flexibility to intentionally avoid IPOs for approximately one year after listing, sidestepping much of the front-running and adverse selection that index funds face.
Dimensional funds also tilt away from the types of stocks that IPOs tend to resemble: small, expensive, low-profitability, high-investment companies — the characteristics academic research consistently associates with poor future returns.
For investors already comfortable with traditional index funds, the implicit costs described here are real but manageable. The mega IPO wave may make them more visible than usual. Whether that's enough to reconsider your approach is a personal decision — but at minimum, it's worth understanding exactly what you're buying into.
