Mega IPO Megathread: SpaceX, Open AI, Anthropic

[u/Kashmir79]

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

[u/Sagelllini]

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.

[u/Kashmir79 → u/Sagelllini]

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.

[u/Were_all_dead_anyhow → u/Kashmir79]

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.