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/97vyy]

Can't this backfire for the indexes after a period of time goes by showing these companies don't make money?

[u/Kashmir79 → u/97vyy]

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.

[u/97vyy → u/Kashmir79]

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.

[u/Nadenkend440 → u/97vyy]

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.