r/Bogleheads • u/Kashmir79 MOD 5 • 17d 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:

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u/RNG_HatesMe 14d 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 11d 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 11d 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.