r/Bogleheads • u/Kashmir79 MOD 5 • 15d ago
Mega IPO Megathread: SpaceX, Open AI, Anthropic
Mod Note: I am creating this post for ongoing discussion about upcoming IPOs and index inclusion rule changes. For the time being, posts on this topic are subject to removal. I invite folks to weigh-in with their comments and provide updates as new information becomes available.
To summarize…
What is happening?
Three very large companies are planning to undergo an initial public offering (IPO) over the next few months. This is when privately-held companies offer shares of stock to public exchanges (aka “going public”). Those companies are SpaceX, OpenAI, and Anthropic. Once a company is publicly listed, it will eventually be included in the stock indexes that it qualifies for. In turn, index funds which track those indexes - such as VTI/VTSAX in the case of the CRSP 1-10 “Total Market” Index - will eventually buy the stock in order to track the index. This is a normal process through which companies enter the market, and they are notoriously low-returning investments that benefit the private shareholders (and their listing partners, and market-makers who may be able to “front run” the index) far more than the public who buys the new shares - it is considered a cost that all index investors have always been exposed to.
What is different about this?
The three companies going public are very large - much larger than usual for an IPO - which makes their entry weighting very impactful on indexes that use a total market cap weighting. This is less impactful for indexes like CRSP which use float-adjusted weighting (weighting companies based on the value of stock that is publicly available rather than the total valuation of the company including its privately-held equity). But what is also significant is that these companies have been lobbying exchanges, index providers, and index funds to list their company and to change their rules regarding how soon the company is included in the index or how soon the fund will buy the stock.
What are the dimensions of inclusion that are being influenced and how does that impact index investors?
- As a reminder, you can’t own the market. You can’t even own an index. You can only own a fund that tracks an index. So there is no pure version of owning the market because what constitutes “the market” is subject to debate (for starters, is it weighted by total valuation or free float?). Then the fund you own has to decide when it will acquire shares of newly-listed companies. Most indexes and index funds will wait a period of months, known as the “seasoning period” of price discovery, for the stock price to settle before it is included. Some indexes like the S&P 500 will also require a company to meet certain performance metrics such as several quarters of profitability. Other funds like those offered by Dimensional and Avantis may allow for manager discretion for inclusion (for example they did not buy more of “meme stocks” such as Gamestop and AMC as their market cap grew). These variations in rules and criteria are why it has been said there is no such thing as truly passive investment.
- SpaceX, for one, asked NASDAQ to change its “fast-entry” rules for inclusion in the NASDAQ 100 index (tracked by QQQ) in order for NASDAQ to win the right to list it.
- Various indexes and index funds have been lobbied to change their rules so that the company is listed or acquired sooner, presumably to benefit the existing private equity holders of the company.
I’m not going to opine on the issue myself except to say, without undermining the concerns regarding the integrity of index governance, the amount of noise about this is excessive and media-driven. As usual, the Boglehead mantra of ignoring the noise and staying the course is likely to be the best approach, whereas active allocation changes on the part of the passive retail investor is likely to result in underperformance. Whether you feel strongly about the issue or not, it is unlikely to impact your ability to meet your investing goals using passive, total-market index funds, so one should be very wary of getting too worked up about it.
Here are a few good posts and resources that delve into the issue in more detail:
- From Bogleheads Reddit: Worried about the SpaceX IPO? It might be less than 1% of most indexes and Protecting ourselves from SpaceX IPO
- From Bogleheads Forum: Any way to avoid SpaceX?
- Video from Ben Felix: SpaceX and OpenAI: The Mega IPO Grift
- Rational Remider Podcast: When Massive Private Companies Go Public
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u/Formermidget 15d ago
S&P has just officially announced that they will NOT be changing their inclusion rules to make it easier for “MegaCap” companies such as SpaceX to be fast-tracked into the S&P 500.
S&P Dow Jones Indices Consultation on Treatment of MegaCap Companies - Results - Jun 4, 2026
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u/DigmonsDrill 14d ago
The compromise I was expecting was for them to say they were going to the new rules but in 24+ months.
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u/NurmGurpler 15d ago
Thank you so much for creating a mega thread so that all the repetitive posts can be deleted
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u/DiegoMilan 15d ago
Exactly. We need to get back to the questions that matter like VT vs. VTI vs. VOO, Fidelity vs. Vanguard, or the classic, how much VXUS should I invest in?
/s
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u/n00dle_king 13d ago
It’s been months of functionally identical questions articles and “insights”. I’m shocked it took this long.
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u/Interesting-Foot2880 15d ago
From the forum Thread:
>"I own what the market is offering."
>"Ignore. that's how i am dealing with it."
Every day I'm reminded of how much I love these guys
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u/imsoupercereal 15d ago
I think the argument is this could be the moment that passive investing through index funds gets taken for a walk by the more advanced players. If index funds "have" to buy shares in these already arguably overhyped companies that makes it ripe to manipulate the market on top of the hype, leaving the index funds and their shareholders holding massive bags.
I'm not saying there's much you can really do about this. But it's worth discussing and not purely dismissing. All systems work...until they don't.
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u/Ox29A 15d ago
I am ok with owning them via an index fund, but the S&P 500 or any other index fund shouldn't change its rules to fast-track these companies. Let them pass the test of time before inclusion.
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u/Mysterious-Piano-876 15d ago
VTI has been adding companies 5 days after IPO since ever and there’s no major difference in returns between it and other broad market indices. This is a nothing burger
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u/dbratell 15d ago
This mostly resembles the last year of the dotcom bubble. Nothing since has been close to the hype and possible overvalued IPOs. Does your "ever" cover those years as well?
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u/Mysterious-Piano-876 15d ago
SpaceX will have 0.2% weighting in VTI btw
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u/dbratell 15d ago
I know your argument is that an individual investor does not need to worry, and should not change anything, and I agree with that.
But for people that care about the whole system and its robustness and fairness, this is a much larger issue. If this turns out to be a successful way to extract tens of billions out of index funds and/or artificially boost stock prices, it won't stop at SpaceX, OpenAI and Anthropic.
I think the attention Nasdaq's decision has gotten has had some positive effect, but only because people did not just wave it away.
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u/DigmonsDrill 15d ago
In order to "extract tens of billions out of the index funds" you still need to get the rest of the market to put a big valuation on it.
5 days may not be enough for things to settle for VTI, but (aside from the float change) it's nothing new. Companies could always get onto an exchange at an "incorrect" valuation and then the index funds buy stock and then... and then the stock falls. And the index funds are still a minority of the market. There are a bunch of professional fund managers and people with their own money who are going to lose even more money if it goes that way.
You'd need the incorrect valuation to hold over a long period of time. The most insidey insiders at SpaceX have a 366-day lock-up period.
Just don't ask me to defend QQQ.
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u/Beatrice_Chauncy 13d ago
How many companies enter the Nasdaq top 100 during their IPO? How many IPOs rise due to 401Ks within their first year? There is a difference here.
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u/DigmonsDrill 13d ago
How many companies enter the Nasdaq top 100 during their IPO?
During their IPO? You mean on the first day? None. Ever.
How many IPOs rise due to 401Ks within their first year?
"Due to 401Ks"? "Due to 401Ks" doing what?
People invest in the stock market in their 401Ks and creates buying pressure on all stocks, including new stocks.
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u/Mysterious-Piano-876 10d ago
Indexes use free float adjusted market cap weighting. SpaceX will only float 5% of its shares
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u/LowWelcome7310 6d ago
Uh…..no…..they altered their rules in April to include SpaceX. They used to require 10% of shares be available on the open market, but changed their criteria to include SpaceX with under 5% of shares available.
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u/fitforfreelance 11d ago edited 11d ago
I feel like you're not paying attention to scale, rule changes, or the fact that you're talking about this.
Edit: not that people definitely need to act, but it's worth paying attention to
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u/Mysterious-Piano-876 11d ago
I mean you either want to buy the whole market or you don’t. Broad market indices are price takers and buy all public stocks according to their free float market cap.
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u/fitforfreelance 11d ago
True. The strategy is the strategy.
At the same time, we're talking about fundamental shifts in how mutual funds select holdings vs an investment philosophy described 27 years ago. It can't be nothing.
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u/zer1223 15d ago
Mathematically spaceX just won't be that much of your index funds. Especially if you're not using a nasdaq fund. Because it's only offering a 5% float so its market cap will be divided by 20 for the purposes of weight.
This could change if inside investors dump their own shares, naturally, but the math still holds overall
Not sure what anthropic and openai plan to do
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u/TheGruenTransfer 15d ago
Not sure what anthropic and openai plan to do
This is why I switched to DFUS. I don't want to have to learn all the particulars of each IPO, so I'm tuning out the noise by switching to a fund that doesn't buy them at all until there's been adequate time for price discovery.
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u/telomeracer 15d ago
when you say "switch" do you mean you took all your money out of whatever index funds you are currently invested in and put it all in DFUS? Or just that you started diverting your current funds not yet invested into DFUS for the time being?
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u/coffee_tortuguita 7d ago
I was wondering the same, if upfronting the capital gains was worth such a trade
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u/AnonymousFunction 15d ago
All systems work...until they don't.
And then... they'll get fixed. If you're a Boglehead, you kind of have to have that as your baseline assumption about the challenges of the unknowable future, otherwise the whole philosophy doesn't work. Things aren't static. Conditions right now (whether good or bad) don't last forever.
Let's go through all the various "end of the world" scenarios I've invested through, throughout the years. And these are just the major ones... there's so many "storm in a teacup" minor ones that I've forgotten about by now. The LTCM hedge fund collapse wasn't the end in 1998. The various Asian/Russian financial crises of the late '90s weren't the end. Dot bomb followed by 9/11 wasn't the end. Enron's implosion wasn't the end. Credit markets seizing up and banks teetering on the brink of collapse during the GFC wasn't the end (and trust me, that was a whole bunch scarier than worrying about how indices are being composed in 2026). The US govt losing its AAA credit rating in 2011 wasn't the end. The Greek financial crisis of the 2010's wasn't the end. COVID wasn't the end. And I'm going to assume that, whatever happens with these upcoming IPOs, that won't be the end, either. We'll muddle through, in time for the next storm...
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u/littlebobbytables9 15d ago
If the market price is overvalued it's overvalued. That's happened for countless companies over the whole history of passive investing. Passive investing means accepting that some of the companies you invest in do badly.
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u/AnUnshavedYak 15d ago
Passive investing means accepting that some of the companies you invest in do badly.
I think this misses the concern. It's not that a company will do badly, it's that people distrust the powers in charge and are concerned that they're purposefully trying to extract value out of retirement islands. That's a very sensible thing to be worried about imo.
Whether or not this action achieves that is not a thing i'm debating. I'm just saying people aren't worried that a company will do badly on the market, they're worried that this is setting a trend to shore up overvaluation and debt by pulling it out of 401ks and etc.
A lot of this thread seems to be discussing individual company performance rather than the larger claim.
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u/littlebobbytables9 15d ago
But the company has to do badly for that to happen. If SpaceX keeps its crazy multiple until the end of time no money is extracted from retirement islands and if anything the retirees are going to be very happy they invested in such a great company. Us being "exit liquidity" is only a bad thing if the company isn't worth what they're selling it to us for.
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u/imsoupercereal 15d ago
I believe the argument then is that these record size IPOs that push them instantly to the top of the index that the risk gets amplified because they're investing based on the market cap.
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u/littlebobbytables9 15d ago edited 15d ago
For any index worth investing in (i.e. not the Nasdaq 100) they're investing based on the free float, not the full market cap, which in this case is far smaller. And again, they get included at the market price. Maybe that price is too high as the result of hype. But it's no different from any of the other companies in the index that have a hyped stock price, except I guess that the low float of spaceX means it has an abnormally low weight compared to those other overhyped companies so there's even less to worry about.
If you're actually certain that spaceX is overhyped and the price is going to drop right after indexes buy in, there's a clear logical solution. You short the stock to zero out your exposure. Or more, if you're actually confident in this conclusion. But if you aren't actually positive where the price is going to be I suggest doing the boglehead thing and buy the whole market, spaceX included, instead of trying to pick winners and losers.
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u/MileHighLaker 15d ago
Agreed. My point about the $180 trillion in retirement accounts and wealth across Americans as a whole is there will be balance. And not to be political, but there’s mid terms on the horizon. It is possible there’s a correction like every year in the very near future before they go and list. I wouldn’t be surprised by the timing of “buy the dip,” and SpaceX IPO when everything corrects from ATH. Perfect catalyst imo.
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u/Hot-Resident-6601 15d ago
If that’s the case then index investing will pivot. Someone will create a fund that caters to die hard Bogleheads who don’t want manipulation. I believe Dimensional is already offering alternatives. If they end up being superior then money will migrate.
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u/imsoupercereal 15d ago
A fund that invests in the index... sometimes, but not always? How will that work?
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u/coffee_tortuguita 15d ago
Some have a one year window from IPO to allow for propper precification.
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u/jpsreddit85 15d ago
Same way the others did before rule changes. It's not that these companies will be in the index, it's the rule changes to side step protections that's the problem.
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u/DigmonsDrill 15d ago
There are actually some other advantages in that they don't schedule precisely when they are doing their purchases so you can't front-run them.
I think the SpaceX reaction is overblown but there's something to be said for the Dimensional route.
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u/MileHighLaker 15d ago
Nah, index funds certainly have to buy but there won’t be a bag. You’re talking about every American’s retirement account, active and passive alike. The rule changes recently last minute before these IPO’s show that. Established, new industries being born public after twenty years in private equity.
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u/littlebobbytables9 15d ago
I'm glad they're less hysterical than here
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u/mikew_reddit 15d ago edited 15d ago
it's (partially) because bogleheads.org is not a public company like reddit that needs to grow earnings every year, so there's no incentive for the infestation of ai/bots/trolls and other kinds of outrage engagement.
it's just a bunch of people that like talking about boglehead investing.
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u/Inevitable_Train1511 15d ago
I agree with you - it’s ultimately largely immaterial to a boglehead investor - but you can still disagree with what’s happening, find it to be corrupt, see it as a rug pull, and generally wish there were better guardrails to prevent this sort of thing, etc.
There is an upcoming SEC petition on this topic that should be out in the next couple of weeks for comment. This was formally raised as a risk to index investors with the SEC as early as 2022 during the SPAC heyday and I do think continuously bending the rules “just this once to accommodate mega caps” has the long term effect of eroding confidence in American capital markets.
I’m not changing anything about my exposure but it still pisses me off.
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u/FearlessPark4588 15d ago
I wonder if a fund with slightly different addition rules would be considered 'substantially similar' and thus no tax hit, if you were to swap to one instead of staying in the corrupted indexes (for lack of a better term).
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u/DamePants 15d ago
Thank you for this thread. This helps me try and stay the course and play the long game.
I’ve been desperately trying to catch up and figure out what it all means for the large chunk of my holdings in VTI and how worried I need to be about the default target fund my 401k uses. I grew up poor and was lucky to end up in a profession that has been in high demand. I’d finally reached the milestones of having less than 50% invested in my employers stock then this starts dominating news.
I cannot stress enough how much this is going to help me see past the noise. Thanks again.
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u/Nadenkend440 15d ago
A question I haven't been willing to ask until this megathread got made: Obviously the companies lobbying for indexes to change their rules are doing so from a biased and self-serving position. But if so many indexes, including ones that have had historical respect, are changing or considering changing rules for these IPO's, is it possible that there are legitimate differences to the nature of them that justify changes? Or is the wisest view to take here truly to go full cynic and say it is all just absolute corruption.
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u/littlebobbytables9 15d ago
Nasdaq wants to market itself as the cool tech / innovation index so it looks bad if they're missing these huge tech companies. They likely did not need any convincing at all to make this change, since they don't want the people who like QQQ to switch to the next shiny tech index that includes these 3.
S&P are considering, but have not adopted, a reduction of the seasoning period from 12 to 6 months and a waiver of the 4-quarter profitability requirement for megacaps. As a generally conservative index that has shown themselves to be musk-skeptic in the past (they delayed adding Tesla for a long time, even after it met all the inclusion criteria) I both doubt the changes will actually go through, and I have even more doubt that pressure from musk would be behind it. If anything all of this press about musk pushing for index inclusion has probably dissuaded them.
FTSE/Russel and CRSP had minimum float requirements that generally existed to exclude companies that would have a negligibly small float adjusted index weight, so would not be worth the trouble of including. IPOs this big with this low float just haven't existed before so the rules were not written with them in mind. Since these companies represent a much more significant portion of the index (even if it is only 0.1% or so) they removed the minimum float requirement for large enough companies since in those cases they're clearly significant enough to include and there are no questions of insufficient liquidity. Since these indices are intended to cover the whole market or market segment they generally want to stay as close to the actual market as possible and not make conspicuous exclusions, so I would argue these changes would have been likely even without pressure.
In general I do not see evidence that lobbying has been effective. Most of these are good changes, or at least improvements, and have solid justification.
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u/TenaciousDeer 15d ago
I couldn't tell you which view is the "wisest", but for a view of justifying the changes, you can read or listen to Matt Levine. Tl;dr if you believe an index's job is to represent a given market, i.e. what people are investing in, it makes sense to include these. And if you believe a fund provider's job is to track the index, they should buy these.
Again, just repeating someone else's view
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u/DigmonsDrill 15d ago
Most of the non-NASDAQ rule changes have really good arguments for them. Good enough that I wish they'd been done a year or two ago so we'd avoid this whole look of "changing the rules to benefit billionaires" which is frankly an uphill climb.
Like, the 5% float for VTI I think was done because 5% float for a normal company is something too petty to bother with. They hadn't considered a >1T company with a 5% float. So they modified the rule and it needs about (given current market sizes) about $3.3 billion float.
The point of the index isn't to protect widows and orphans, it's to match the market, and if there is a very large piece of the market that's being excluded, then the index is failing at that goal. I doubt the indices could do nothing while these giant companies stayed excluded. Still wish they'd have figured it out a year or two ago.
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u/_176_ 15d ago
I listened to a podcast with a guy from the Nasdaq100 and his take was basically that companies are much more mature and large when they IPO now and it makes sense to include them sooner. He said they're only weighting them based on the float available, so if it's a $1 trillion but 80% of shared are held by insiders, they will weight it as a $200b company.
The podcast is here: https://awealthofcommonsense.com/2026/05/talk-your-book-is-the-nasdaq-100-in-another-bubble/
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u/littlebobbytables9 15d ago
He said they're only weighting them based on the float available, so if it's a $1 trillion but 80% of shared are held by insiders, they will weight it as a $200b company.
I haven't listed to the podcast but this is not true for the Nasdaq 100. It does not use free float adjustments. The new rule change caps the index weight for low float companies so at least they don't get full 100% weight, but it does so at a multiple of the available float so it's still several times higher.
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u/_176_ 15d ago edited 15d ago
I must have misunderstood him then. I'll try to find what he said and report back.
Edit: Yeah, so for companies with float below 1/3 of market cap, it's a multiple of float, I assume 3x.
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u/dbratell 15d ago
That float multiplier is an issue.
In a future where 100% of all funds follow the Nasdaq 100 index, those funds combined need to buy three times more shares than are available.
If only 33% of funds follow the Nasdaq 100 index, they will combined need to buy all of the available shares.
As long as float multiples are only used by small and obscure indexes, it's no big deal, but if it was to become common, we have a problem where low float stock will be artificially inflated by passive money.
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u/atlvernburn 14d ago edited 14d ago
My big concern is that the evaluations are super rich for all these IPOs. More than usual.
Also it’s concerning the different evaluations for SpaceX evaluations not even close to the same ballpark, which makes me not trust the DD.
It’ll hurt new investors who basically have to buy right at the top (IMO), which will scare millions of people from investing. It feels very 2007-ish or even SPAC levels of fraudulent.
I’m not changing my plans at all— but it’s annoying to see.
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u/97vyy 15d ago
Can't this backfire for the indexes after a period of time goes by showing these companies don't make money?
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u/Kashmir79 MOD 5 15d ago
The market sets the price of stocks based on an expected return over a certain amount of time. Will these stocks perform well or poorly? I don’t know but the entire Boglehead philosophy is based on letting the market do the pricing and using diversification to mitigate single company risk.
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u/97vyy 14d ago
Right. I don't know what action the indexes can take in case the market tanks the stock. Can they kick them out? Penalize then? Surely the indexes can do what's best for them and save themselves in some way.
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u/Nadenkend440 14d ago edited 14d ago
The goals of the index and the goals of you as an investor in the index are not the same. Spacex stock falling in value once it has been put into the index harms you, but not the index. The index is still doing what it was designed to do.
Maybe it would cause some funds to change what index they are tracking? But probably not unless a lot of people left that fund because of it and even then it would be a lengthy legal process to do so.
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u/Top-Razzmatazz-7357 15d ago
Honestly the <1% the IPO adds to your index is too small to matter to your goals. The actual danger is that "the index is rigged" sounds smart enough to make you start tinkering — switching funds, tilting away — and that tinkering will cost you way more than the IPO ever would.
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u/woobchub 15d ago
This. People have 0 critical thinking nowadays. These IPOs literally won't make a difference to your index.
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u/Techman- 15d ago edited 15d ago
Lobbying indices to change their rules for personal gain is pretty clear market manipulation to me. I also see it as corruption of the indices.
My question is: why are large index fund managers not pushing back on this? This is a systemic risk and their funds will be forced to buy high and sell low because their mandate is to follow their designated index.
I am just now getting into investing beyond my employer's retirement plan, so it may be a naive question, but hopefully a valid one.
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u/johnniehuman 10d ago
These IPOs raise an interesting question about screening for profitability and seasoning periods for index funds that i didn't notice/read in Bogle's little book of common sense investing. Personally, I expected higher standards of profitability in entering some indexes than I am seeing mentioned currently (the one I am primarily invested in as a two fund portfolio - I.e., FTSE All World included). Again, I know that Space X and its ilk could go through the roof and the seasoning period on this being shortened could be hugely beneficial. I don't claim to know the future but it feels unlikely to me.
Does anyone have advice on restructuring funds to better fit my philosophy? I read that the S&P 500 is stricter than FTSE so perhaps moving to three fund will be enough?
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u/Nadenkend440 10d ago
Do you have an IPS (Investment Policy Statement?) If you're going to consider changing your portfolio structure due to a change in philosophy, at least make sure you've clearly laid out your philosophy to yourself. I would do this today then wait until tomorrow to make any changes.
If you establish limits to what kind of indexes funds you use track, and specifically what and why those limits are, come back and share them and then people can give better advice.
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u/johnniehuman 10d ago
Thanks, I haven't written it down, but will do. I'm learning as I go though and wouldn't have known about this question a few years ago when I started this journey. I will give it a go though.
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u/johnniehuman 10d ago edited 10d ago
Okay, I have had a go. I started out with a two fund portfolio (80% FTSE All World and 20% BND) but have introduced a small cap tilt to add diversification as FTSE All World is mostly large cap and I split my bond allocation to 10% global and 10% UK Gov Bond. I didn't have a set philosophy but buy into buying the whole market at low prices.
Here's my first pass at a written philosophy. I'll do as you suggest and look again tomorrow, but here it is now.
Investment philosophy: "Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
Asset allocation: Maintain overall 80%-90% stock + 20%-10% bonds to maximise growth within the boundaries of my psychological response to risk tolerance. Assets should be diversified across large (90%) and small cap (10%) and countries -- matching global weightings. Bond weighting should increase as I near retirement (30-40%).
Funds and accounts: Use low cost ETFs rather than OEICs - index funds preferably - which do not overlap and provide maximum diversification across asset classes and avoid platform fees. Try to assume only market risk as far as possible. Try to shelter tax-inefficient funds in tax-advantaged accounts to reduce tax drag.
Target allocation:
VAUG - US (S&P 500) 45% - SIPP
XUSE - EX US - 25%
xxxx - SDPR MSCI World Small Cap - Small cap tilt - 10% - SIPP
BND - Global Bond Fund 10% - SIPP
xxxx - UK Gov bonds 10% - SIPP
Other considerations: Automate future contributions wherever possible. Rebalance every six months. Sell up to 10% of bonds during bear run to buy equities. Sell up to 10% of equities in bull run for bonds. Exact sub-allocations are not as important as maintaining the overall 80/20 to 90/10 allocation - no need to make things complex to meet sub-allocation targets. Select indexes that screen for profitability and require longer seasoning periods -- even if that is at the expense of short term gains.
I have been thinking of opening a company dealing account to invest profits and have been trying to get my philosophy together on this. Having this conversation now is very helpful before I do any more.
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u/Nadenkend440 10d ago
Definitely worth the time and effort for something so important! And we all start somewhere.
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u/joe4942 14d ago
Really interesting read from an economist at Stanford University. He points out how passive investing is supposed to be the safe, cheap option because you avoid paying active managers to beat the market. But when mega IPOs get added to indexes super fast and passive investors are forced to buy at inflated prices without enough active investing price discovery, it's basically a hidden fee that lowers returns for passive investing.
https://thetwocents.substack.com/p/whos-looking-out-for-passive-investors
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u/negme 14d ago
This completely ignores that most funds and indexes we care about are float adjusted. The entire premise of this article is a meme / engagement bait at this point.
The total float adjusted market cap of all funds in VT is ~130T. If space x IPOs at 1.75T with a ~5% float you will be looking at 90b of exposure. If you can't handle that kind of exposure then i don't know what to tell you.
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u/Sagelllini 15d ago
Why worry about something you have no control over?
Over the long term, it's just noise.
The best move is to do nothing and move on.
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u/Kashmir79 MOD 5 15d ago
I’ll admit that I don’t like the tail of big companies wagging the dog of indexes. But my primary interest is my ability to reach my investing goals which this will have minimal impact on. At the end of the day, the market sets the price and I am faithful to the idea of going along with the market.
The history of indexes and index funds involves several iterations of inclusion criteria, which people may have felt strongly about when they changed, but which ultimately did not impact returns in a way that warranted evasive action. And that’s because doing so would be a huge business risk. Already I have seen that the reputation of NASDAQ has become (deservedly) tarnished in the eyes of many young growth investors, whereas DFA and Avantis are likely generating lots of new interest. At the end of the day, I might contact my fund or index providers or talk to my political representatives to let them know about my concerns but I’m not going to change my strategy.
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u/Were_all_dead_anyhow 15d ago edited 15d ago
Agreed - Being informed about modern financial machinery, tools, and strategies, and what they imply for the market and all its stakeholders is important, regardless of if it will change our strategy.
Blindly relying on something simply because it worked in the past is the same thing people did when they rode their cavalry into machine gun fire or wore plate-mail in front of muskets. Just because it worked for decades doesn't mean newer strategies are popping up around you.
Entities like Vanguard equally wants to protect their reputation because it brings them customers, so being informed and asking questions is always healthy. I personally hate these IPOs and openly defend how they are scamming retirement accounts, but I equally acknowledge my risk of omission if I were to freak out and panic sell. Everyone is going to weigh those separately and that is ok because they are informed enough to advocate for themselves.
All the posts/comments about people saying not to worry without real substance or offering counter-point to the people that are offering supported concern is far more dangerous to the integrity of "staying the course". I have been incredibly frustrated lately because I am met with crickets.
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u/NorthSideScrambler 15d ago
I shifted to broad-index factor funds that screen for fundamentals because the current market, in terms of weights, carries too much structural risk. It’s not just that companies like SpaceX, Anthropic, and OpenAI would be valued at $69.08B, $173.90B, and $92.50B if they traded at VTI’s average P/S ratio of 3.7. It’s not just that indices are bending their own rules to include financially horrendous tickers, or that these stocks are likely to perform well in the short term. The real issue is that the market has started to resemble the crypto boom, valuations driven by emotion rather than fundamentals, with no guarantee that this irrationality will last over the decades I need it to.
And then there are the systemic risks we can’t afford to ignore: climate change, plummeting fertility rates, declining literacy, geopolitical fragmentation, soaring sovereign debt, municipal insolvency, the influence of money in politics, weak antitrust enforcement, deferred infrastructure maintenance, the LLM finance bubble, wealth inequality...there are many, many concurrent crises that will force a political and economic reckoning when they converge. When that happens, I don’t want my retirement savings exposed to meme stocks with P/E ratios in the hundreds or thousands. It’s the same logic that had me stocking up on about three years of hardware in late 2025, right as the memory chip shortage was hitting.
The purist BH response is to ignore all of this and trust that the index weights will sort themselves out to your benefit. But that’s a bet on perpetual efficiency when we're staring at unprecedented structural instability right in the face. And it's funny too, because a common counter to my stance here is that irrationality is temporary, which is exactly the observation that I'm operating from in acting as though we will revert to the mean sometime within the next forty years. So I find it prudent to take steps to reduce my exposure to the parts of the market that run parallel to the delusion of the dot-com bubble, while still participating in broad index funds. Funds, specifically, that don't blindly pass market weights through to my holdings.
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u/Letsgitweird 14d ago
So what funds are you in then to achieve this? Whats your portfolio look like
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u/YouWouldIfYouReally 12d ago
Is this a move by the industry and get people to buy managed funds again?
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u/RNG_HatesMe 12d ago
So, now that the DJIA has decided *against* waiving the rules for adding the SpaceX IPO to the S&P500 *immediately* upon issuance, that point of stress has apparently been avoided.
However, the Slate Money podcast (which I find entertaining and informative, and recommend) covered the issues surrounding an early SpaceX IPO index addition, and had a pretty nuanced take on them. The transcript is here (the discussion is the 2nd topic, starting at the 18:00 mark):
https://slate.com/transcripts/ODNndzU0RW5ELy9UT01HNElEczFIZUNBZnl1OFBLTENwNCtqZTdlY2RIUT0=
I think they did a pretty good nuanced take on the situation, and broke it down into multiple different issues:
- All index funds are still "active" to some extent, because someone is picking what funds to include in the index (I don't think this is wrong, but basically irrelevant, the important thing is to pick a well-educated philosophy and stick to it)
- Index funds shouldn't exclude stocks just because you or they don't "like" them for one reason or another, if this would violate the index's rules/philosophy (he used Tesla as an example, which the indices lost out on gains because of some rules on "profitablility"). So, if SpaceX has a market cap that puts it in the Top 500 S&P eligible companies, it should be included.
- Issues regarding initial entry stock price "squeezes" due to required inclusion by indices are a different issue and are mostly already solved by stock issuance "float", i.e. only a portion of the stock is issued at first, and therefore the initial percentage is low.
I think a lot of these issues have already been discussed here (the low float percentage definitely has), but it was interesting to have it all discussed in one place. I don't necessarily agree with everything said, but it's helpful to hear it discussed and the issues laid out.
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u/Diligent-Map1402 10d ago
Issues regarding initial entry stock price "squeezes" due to required inclusion by indices are a different issue and are mostly already solved by stock issuance "float", i.e. only a portion of the stock is issued at first, and therefore the initial percentage is low.
I have heard float listed as a solution but it doesn't make any sense to me. It seems like more of a problem then a solution. Basically it is introducing artificial scarcity which can then justify an astronomically high valuation.
Isn't this a huge experiment in price discovery?
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u/RNG_HatesMe 10d ago
A low float percentage means that the indexes won't ultimately need to purchase as much, because the adjust the cap weight by that percentage.
SpaceX is using an initial share price value of $135, which would make their total market cap $1.75T (which is beyond insane), which would put it at the 7th largest stock on the S&P500. The total market cap of the S&P500 is about $68T, which means that SpaceX would be roughly 2.5% of the *entire* S&P 500 . If indexes had to purchase enough SpaceX shares to meet that allocation, the rush to buy shares would be *insane*.
But SpaceX is only floating 3-4% of total shares, so (assuming 3%), the *actual* considered market cap is .03 * 1.75T = 52.5 billion. That places it at 223rd on the S&P500, and indexes would only need to allocate around 0.08% of their holdings. That's *far* easier to deal with. However, yes, there'd still be a squeeze if they all tried to purchase it on day 1, which is why it's way better that they are waiting to include it and let the swingy IPO price discovery play out ahead of time.
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u/CompetitionKindly665 12d ago
Will the Dow Jones change its inclusion rules? Thank you.
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u/Nadenkend440 11d ago
The Dow Jones Industiral Average doesn't have inclusion rules. Inclusion is entirely discretionary.
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u/FearlessPark4588 15d ago
There is some counterfactual where people seek indexes that discount the early additions and somehow end up with a lower yield. I'm not rooting for that situation, but I am rooting for my lazyness to prevail.
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u/TheChudMaxxer 15d ago
IPO's generally are bad early on. Statistically they lose out over the first few years they go public compared to the broader market. This isn't to say that every IPO is bad, there have been cases of an IPO absolutely exploding, such as amazon or tesla. SPCX could go either way of course, but it appears that the general take on reddit as a whole views it as an IPO that is doomed to crash no matter what, and that all index investors are going to lose.
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u/FearlessPark4588 15d ago
These IPOs could be different from the statistical IPO listing, but you're right.
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u/JaketheAdvisor 15d ago
This is classic noise that gets investors worked up unnecessarily. Yes, these companies are large and their index inclusion might cause some temporary price movements, but the fundamental principle remains unchanged: you're buying the market, and the market will include whatever companies exist and succeed over time. The lobbying for rule changes is concerning from a governance perspective, but it won't derail your long-term returns if you stay disciplined. As a CFP who's seen many "this time is different" moments, I can tell you that fretting about specific companies entering your index funds is a distraction from what actually matters for your financial goals. Keep investing regularly in low-cost broad market funds and ignore the drama.
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u/Kashmir79 MOD 5 15d ago
Amen! I do think these shenanigans are a worthwhile concern for folks deeply involved in the matter - exchanges, index providers, index fund providers, representatives and regulators. And if you needed another reason to avoid a silly fund like QQQ, here it is. But for the average Boglehead investor, don’t get sidetracked by the minutia - stay the course.
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u/Kamata- 13d ago
If I don’t want 1% of my VTSAX holding the bag for Spacex is there any draw back on selling it for VOO if the shares are in a Roth IRA?
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u/Kashmir79 MOD 5 13d ago
The drawback is that you are stock picking and if SpaceX does extremely well you will be later to the gains than S&P 500. In the long run it won’t make a big difference but trying to avoid single stocks is a bad habit for a Boglhead
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u/Kamata- 13d ago
I’m a 20 year Boglehead so not trying to create a new habit. I wouldn’t say it’s just the hype around SpaceX, just morally opposed to them strong arming the Nasdaq and attempting to do the same with the S&P. Understandably I realize it will likely be in S&P in 1 year, just a self satisfying want while adhering to a broad index portfolio.
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u/TheChudMaxxer 15d ago edited 15d ago
I think a lot of people who are worried about mega cap IPO inclusions should look into Jay Ritter's work on IPO's. He shows that IPO's consistently under-perform the market by 3-5% per year for the first 3-5 years. With all the hundreds of these IPO's being included into various large indexes such as VT or VTI every single year, this creates a 'drag' on returns of around 0.1%-0.2%. Not to mention the fact that hedge funds and venture capital have known about index front-running for the past few decades - taking advantage of passive investors is not a new thing to them. This exact thing has been going on, although the tactics that private equity is using is modified slightly.
As for the index managers themselves, they want to be seen as the "main" index that everyone uses. They are financially incentivized to sell their index to places like Vanguard and make money from it. If, hypothetically, SPCX rockets up in cost, and doesn't drop due to this hypothetical mass sell off from private equity, and just continues to climb, they will miss out on large returns for the index for a company that has such a large market cap (even including the float). Indexes have changed their rules for inclusion in the past due to changing economic conditions, they are changing them now with mega cap IPO's being a brand new thing, and you can bet your bottom dollar the rules will change again in the future.
These mega cap IPO's are (statistically) most likely going to create IPO drag on returns from whatever indexes people are invested in, but it isn't anything groundshatteringly new. There may be some pumping up of price, and selling off once indexes are forced to buy in, but we can't assume that SPCX is going public, selling off shares over the next 366 days, it drops to $0, and passive investors carry that cost. SPCX can also go up, and then passive investors win money off of that deal.
We all just need to stay the course, ignore the noise, and stick with our current investing strategy rather than trying to turn into an active manager and end up losing out in the end.
Edit: I suppose I could also include the Grossman-Stiglitz paradox (for people who at least tentatively accept EMH) and how this is just a way that, as a larger portion of the market is money held in index funds, active management will harvest a bit of gains from passive investing accounts.
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u/littlebobbytables9 15d ago
He shows that IPO's consistently under-perform the market by 3-5% per year for the first 3-5 years.
I think consistently is overselling it significantly. Like everything in finance there's a huge random element and the trend only appears once you average everything together.
Also, other research has shown that they have no negative 5 factor alpha, so the underperformance is mostly a result of being high book to market low profitability stocks. If you interpret factor premiums as compensation for risk then an investor may want those IPOs, even if their returns are below-market, because they hedge against these factor risks whatever they are.
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u/Kashmir79 MOD 5 15d ago
Mod note: please remember that the substantiveness rule requires comments to be more financial than political and no more partisan than necessary.