By AdvisorAnalyst Editorial Team
The names are exciting. SpaceX. OpenAI. Anthropic. These are companies that have captured the imagination of an entire generation of investors. And soon, many of them will go public. When they do, index fund investors may be forced to buy their shares — at any price — whether they want to or not.
That is the warning from Ben Felix, Chief Investment Officer at PWL Capital, whose blunt analysis of the upcoming mega IPO wave cuts through the hype and lands on an uncomfortable truth: the mechanics of index investing may turn these headline events into a quiet but costly tax on everyday investors.
Index Funds Don't Get to Say No
The foundation of Felix's argument is structural. Index funds do not make discretionary decisions about what to buy. They track an index. When a stock enters that index, the fund buys it — at whatever price the market sets.
"Companies tend to go public when they think they can sell their stock at a high price," Felix explains, "meaning the moment you can buy their stock on the secondary market is precisely when the insiders believe it's overvalued, or at least nicely valued."
Index funds have no way around this. They are, in Felix's words, "forced to gobble up whatever's included in the index, regardless of its price." For investors in those funds, that means buying into a company at the moment its founders and early investors have decided to cash out.
The problem is amplified by something called fast-track entry — a rule that allows some indices to include a new stock within five days of listing. The S&P Total Market Index uses this rule. So does the CRSP US Total Market Index, which underlies VTI, one of the most widely held ETFs in the world.
A 2025 academic paper studied what happens to stocks that get fast-tracked into these indices. The result: fast-track IPOs outperform their non-fast-track counterparts by over 5 percentage points right after listing. That sounds good. It isn't. The outperformance peaks at the index inclusion date and then reverses sharply within two weeks.
"Index funds are being front run by intermediaries like hedge funds who know that index funds are going to be buying the shares once they become eligible for index inclusion," Felix says, "and then the index funds end up holding the shares as they revert back down closer to their IPO price." He calls this a "shadow tax" paid largely by index fund investors.
The Rules Are Being Rewritten for SpaceX
Felix raises a sharper concern about what index providers are doing right now. Both S&P and Nasdaq are reportedly considering changes to their inclusion rules — changes that would accelerate when mega IPOs like SpaceX can enter major indices.
Nasdaq recently approved rule changes that would speed up IPO inclusion, eliminate its 10% minimum float requirement, and introduce a float factor for weighting low-float stocks. Felix's read on this is direct: "The cynical view on this is that Nasdaq is changing the Nasdaq 100 index rules to win SpaceX over in an effort to get their listing on the NASDAQ exchange. Including them in the index would force significant index fund buying, which likely ends up being good for SpaceX, its early investors and Nasdaq, but potentially comes at the expense of Nasdaq 100 index fund investors."
SpaceX plans to float less than 5% of its equity at a valuation of $1.75 trillion. That makes it a low-float IPO — a category with a particularly grim historical track record.
Professor Jay Ritter, co-author of the landmark 1995 "New Issues Puzzle" paper, shared exclusive data with Felix. Going back to 1980, Ritter identified 11 low-float IPOs — defined as below 5% public float — for large-revenue companies. Ten of the eleven underperformed the market within three years. The average underperformance was roughly 50% from the offer price and over 60% from the first-day close.
SpaceX's projected valuation would put its price-to-sales ratio above 100 times. For context, Felix notes that the highest price-to-sales ratio among current S&P 500 constituents is Palantir at 73. The index as a whole trades at 3.1 times sales. "In general," Felix states, "high valuations are associated with low expected future returns."
IPOs Have Always Been a Bad Deal
This is not a SpaceX-specific problem. Felix walks through decades of evidence showing that IPO investing is one of the worst strategies in public markets.
The 1995 Ritter paper — which covered stocks issued from 1970 to 1990 — found that IPO investors earned average returns of only 5% per year, while comparable listed firms returned 12% over the same period. To build the same wealth over five years, an IPO investor would have needed to put in 44% more capital than an investor in established firms.
A 2019 Dimensional Fund Advisors study covering more than 6,000 IPOs from 1991 to 2018 found that IPO portfolios underperformed both the market and a small-cap index by about 2% per year. The Renaissance IPO ETF, which invests exclusively in large US IPOs, has underperformed VTI by more than 6 percentage points annualized since its 2013 inception.
Felix's summary of what IPO portfolios look like under the hood: "The IPO portfolio behaves like a portfolio of small growth, low profitability, high investment stocks, also known as junk or small crap growth." Ritter's database, updated 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.
There is also a cost to index funds beyond just holding bad stocks. A 2025 paper on index rebalancing found that the forced buying and selling required to track indices — especially around IPOs — creates a performance drag of between 47 and 70 basis points per year compared to a delayed rebalancing approach. "Index funds end up buying high and selling low," Felix says plainly. "This issue right here is one of the reasons that I don't use them personally or for the clients of PWL Capital."
Chasing Private Market Access Is Worse
For investors who think the answer is to buy SpaceX before it goes public, Felix has a cautionary word. The stories of pre-IPO access are often stories of exploitation. He points to a special purpose vehicle reported on by the Wall Street Journal that charged a 4% upfront fee plus 25% of future profits — before any return was made. Questions about ownership structure, legal clarity, and outright fraud are common.
One ETF that did manage to buy SpaceX shares through an SPV — the ER Shares Private Public Crossover ETF — has lost money in absolute terms since the December 2024 investment, even as SpaceX reportedly rose in value. "Investors are so eager to get a piece of SpaceX that, at least in this case, they got burned," Felix notes.
He cites Morningstar's Jeff Tack: "When it comes to investing, the more you covet something, the more you should probably question your desire to own it in the first place."
5 Key Takeaways for Advisors and Investors
1 Index funds are structurally forced to buy IPOs at the worst time. The mechanics of index inclusion mean that funds must buy new stocks as they enter the index — often right when early insiders are selling and valuations are highest. This is not a flaw that can be engineered away. It is built into how indexing works.
2 Fast-track inclusion turns index funds into predictable targets. Hedge funds and other intermediaries front-run index fund buying around IPO inclusion dates. The 5-percentage-point pop around fast-track entries evaporates within two weeks — leaving index fund investors holding the overpriced shares.
3 The historical record on IPOs is damning and consistent. Across every major study and time period, IPOs underperform the market significantly. Low-float IPOs — the structure expected from SpaceX and OpenAI — are the worst category. Average three-year underperformance of 19 percentage points is not a warning. It is a pattern.
4 Chasing pre-IPO access is likely to cost more than it returns. Fees, complex structures, illiquidity, and outright fraud characterize the private market access space for retail and advisor-level investors. The intermediaries offering access are not doing so out of generosity. Price and cost will absorb most or all of the perceived advantage.
5 Index alternatives that avoid IPOs may be worth a serious look. Funds that do not track an index — such as those from Dimensional Fund Advisors — can intentionally avoid IPO shares for the first year after listing and tilt away from high-price, low-profitability stocks. For clients who want broad market exposure without the IPO drag, this is a structural solution, not a tactical one.
Ben Felix is the Chief Investment Officer at PWL Capital and host of the Rational Reminder podcast. This article is based on his public video commentary and does not constitute investment advice.
Footnote:
Ben Felix. "SpaceX and OpenAI: The Mega IPO Grift." YouTube, 5 Apr. 2026.
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