April 23, 2026

Episode 406: When Massive Private Companies Go Public

April 23, 2026

In this episode, the Rational Reminder team unpacks the mechanics and implications of mega IPOs like SpaceX, OpenAI, and Anthropic potentially entering public indices. They explore how index funds handle IPO inclusion, why newly public stocks tend to underperform, and how structural features of indexing can lead to systematically buying high and selling low. The conversation dives into academic research on IPO returns, the role of free float in index construction, and how evolving market dynamics are forcing index providers to reconsider long-standing rules. They also examine alternative approaches from firms like Dimensional and Avantis, and whether investors are truly missing out by not accessing private markets. This episode blends market structure, empirical evidence, and investor behavior into a nuanced look at one of the most talked-about investing topics today.

Key Points From This Episode:

(0:00:04) Introduction to the Rational Reminder Podcast and hosts.
(0:00:19) PWL Capital expands to Vancouver through partnership with Macdonald Shymko & Company.
(0:03:45) Main topic: “Mega IPOs” and concerns about index fund exposure.
(0:05:00) Why large private companies going public matters for index investors.
(0:06:55) Index funds aim to represent markets—not optimize returns.
(0:08:41) Massive scale of index funds and implications for IPO demand.
(0:10:19) Why IPOs tend to have low expected returns.
(0:12:39) How index inclusion rules differ (S&P 500 vs total market indices).
(0:15:53) Research on “fast-track” IPO inclusion and front-running effects.
(0:18:59) Why mega IPOs may amplify existing inefficiencies.
(0:20:39) Important reminder: indexing trade-offs are small and structural—not fatal.
(0:21:29) Potential solutions like pre-allocating IPO shares to index funds.
(0:23:24) The role of free float in determining index weight.
(0:25:00) NASDAQ rule changes and implications for low-float mega IPOs.
(0:27:40) Conflict of interest concerns in index rule changes.
(0:32:43) Why index providers may need to evolve with changing markets.
(0:35:27) Historical changes to index methodology (e.g., float adjustment).
(0:37:21) Why IPOs are historically poor investments (“new issues puzzle”).
(0:40:28) Evidence from Dimensional on IPO underperformance.
(0:41:14) IPOs behave like “junk” stocks (small, unprofitable, high growth).
(0:43:04) Low-float IPOs and extreme underperformance data.
(0:46:00) High valuations (price-to-sales) linked to worse IPO outcomes.
(0:48:00) Index rebalancing as systematic “bad market timing.”
(0:50:03) Dimensional vs Avantis approaches to IPO inclusion.
(0:52:56) Trade-offs and tracking error across different strategies.
(0:54:16) Importance of investor discipline amid changing narratives.
(0:56:00) Are investors missing out on private markets?
(0:58:00) Risks and costs of accessing private shares (SPVs, fees, fraud).
(1:00:15) Indirect exposure to private companies through public equities.
(1:02:52) Final takeaway: index investing already captures most opportunities.
(1:03:25) Wrap-up: IPOs are a known cost—not a reason to abandon indexing.

Read The Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer, and Cameron Passmore, Chief Executive Officer at PWL Capital.

Dan Bortolotti: Good to be back.

Ben Wilson: Yeah, good to be back. It's episode 406, exciting to get into the main topic later on this episode.

But before we get to that, exciting news that many people have probably already heard by the time this episode is coming out, but PWL made a pretty cool acquisition in Vancouver, BC, partnered up with the Macdonald Shymko & Company team out in Vancouver. So we now have a great team out there and officially a PWL office space. So as we continue to grow and find like-minded advisors that are implementing a similar philosophy and financial planning-driven approach to their clients, we are expanding our presence across the country. This is a great team to be partnered with.

Dan Bortolotti: Pretty well-known financial planning firm has been around for a long time and pioneers in that industry, specifically fee-only planning, I think originally. It's fitting to have them on board.

Ben Felix: A fee-only planning pedigree and they went into portfolio management and on that side of the business, they're super, super aligned with the way that PWL operates. You said pioneers, Dan, I was going to say OGs, but you know, they're one of the oldest financial planning firms around and have been in business for a very, very long time and they've been super involved with moving the financial planning profession in Canada forward. Very cool to have them part of our team.

Ben Wilson: Some of their early founders were part of creating the RFP designation, which is the Registered Financial Planning Designation, which has now become known as almost a step above the CFP. The CFP is our prerequisite and it's kind of elevating the profession to a higher advanced planning level.

Ben Felix: Yeah, the RFP is a more advanced kind of version of the CFP, I guess. IAFP, who issues the RFP designation, is a very cool organization that, as you said, Macdonald & Shymko has been heavily involved with, as was one of PWL's founders, Tony Layton, back in the day. Very cool to partner with these guys. Makes a ton of sense, I think, for both firms.

Ben Wilson: Absolutely. In the spirit of PWL's growth and what we're doing on the M&A inorganic growth side, we're trying to build up what we're calling an integrated wealth management firm, which is a bit unique in the independent space in Canada in particular, but we're trying to focus on the idea that market's work and planning matters and trying to find like-minded partners that are looking to be part of something bigger.

We have started a monthly webinar series that's primarily directed at advisors. By the time this episode comes out, the next one is slated for May 26th. Keep an eye out for news on that episode, but those webinars are kind of centered around what's your next chapter, exploring what might be possible, how PWL's model might be different, and looking at what you might want to consider through your succession options and be curious.

It's always important to think ahead to your succession plan, even if you're not ready to make that move in your career.

Ben Felix: It seems like a pretty good opportunity for advisors to talk to a group of people that have spent a lot of time thinking about practice management and succession.

Ben Wilson: They've always been great discussions so far. We've already done a few of those and there's been lots of engagement, lots of great questions, and people are just curious to learn more. That's all it's about, making connections and learning from each other.

Ben Felix: Awesome. All right, should we jump into the main topic?

Dan Bortolotti: Let's do it.

Ben Wilson: Yeah, let's do it.

Ben Felix: I did a video on this topic and the title was kind of aggressive. I don't know.

Dan Bortolotti: Very out of character for you.

Ben Felix: I don't know if we'll call this episode the same thing, but that one we called the Mega IPO Grift. Anyway, that's roughly what the topic is. It's just about some of the big IPOs that are coming down the pipe here, potentially.

People who watch my YouTube channel may be thinking that this is going to be a repeat of what they saw on my channel. A lot of it is similar content, but I do have some new information to add to this episode discussion. On a few points, I had some emails with Professor Jay Ritter and got some interesting new data points.

I also talked to the folks at Avantis about how they handle IPO inclusion, which is actually different from how Dimensional does it. I mentioned Dimensional in the video, so that's interesting, but we'll get to that in a minute. The main issue here, and I saw this coming up a lot online, which is why I thought it made sense to make a video about it.

The main issue is that some massive private companies are set to go public soon. SpaceX, OpenAI, Anthropic, there are a few other ones, Databricks, a couple of others as well. These are private companies that would rank among the largest public companies if they were public.

The interesting thing is, and the relevant thing is, for people who think like us and invest like us, buying the market basically, at least as a simplification, the implication here is that if those companies go public and get included in an index, if you are an index fund investor, you're going to end up potentially buying some of these companies when they go public, whether you like it or not. I think there are lots of other issues around this too. Separate from the investment thesis, some people don't like the idea of investing in certain companies for other reasons.

We won't get too much into that, but the issue is that index funds buy these stocks if they get included in the index. One of the issues with IPO inclusion, and we've done episodes at least tangentially related to this, although in some cases directly related to this in the past, is that IPOs tend to be pretty terrible investments. These ones in particular, these big SpaceX and OpenAI, raise some, I think, pretty interesting questions.

We'll talk through in this episode how stock indices and the index funds tracking them include IPOs, which is a whole interesting thing in itself. How do the different indices include them, how that might affect index fund returns, and what investors can do about it. We'll also cover whether index fund investors are missing out on private market returns, which I think is a really interesting topic and a common perception based on companies like the ones we're talking about, staying private longer and getting bigger in private markets. That's the setup. Do you guys have any comments before I keep going?

Dan Bortolotti: We got into that question about whether index fund investors were missing out on private markets in a previous episode. Fairly controversial topic. Some smart people disagree on it, but yeah, I guess now we're looking at the opposite, is that is there a portion of the market that index fund investors might want to recuse themselves from, and we'll see where that goes.

Ben Felix: Right.

Ben Wilson: I think this is also a fascinating example of how different changes in the markets can impact investor behavior, which we'll be commenting on throughout the episode as well.

Ben Felix: For sure. People want to find the problem with index funds. There are problems with index funds.

We've talked about them on this podcast in the past. In general though, they're great investments because they just deliver the returns that the stock market has to offer. That doesn't mean that they're perfect, and the pieces where they're not perfect are always interesting to talk about, but I think index funds are still great investments.

People love to find that thing like, this is a thing. This is finally the thing. This is the thing that breaks index funds.

I don't think this is that. I'm not that worried about this, but I do think it's a really, really interesting topic. The main issue is that because their primary role is representing the stock market, some indices aim to include new IPOs soon after the company goes public.

Now, you got to think, if the purpose of the index is representing the stock market, not being a great investment, whatever, whatever, it's like our goal, we're the index, we're representing the stock market, that makes perfect sense. You should include IPOs. Ideally, in an ideal world, they get included immediately, as soon as they're listed.

The problem, or the nitpick at least, is that IPOs have had historically terrible returns if you invest in them soon after the IPO. If you own private company shares before the company goes public, there tends to be a first day pop, so that can be kind of nice, but if you buy on the secondary market once the company's trading, the returns on average historically have been pretty terrible. We'll come back to that later with some interesting data just on IPO returns, but just to bring it back to index funds, index funds today control trillions of dollars.

There's one Vanguard fund with $2 trillion of assets in it. It's a dual, it's an ETF mutual fund share class, one of those funds, but $2 trillion between the two share classes in one fund. That's wild.

Ben Wilson: It's a huge number.

Ben Felix: It's crazy. Now, if you're a company listing on the stock market, or if you're an investment bank facilitating an IPO, getting the stock included in a major index or multiple indices, even better, can mean huge investment dollars flowing into the shares of the company on public markets because index funds are forced to buy. Now, what does that do?

Well, it increases the price probably, and we know that it does from some of the data we'll talk about. It gives sellers liquidity, increases the share price. If you're the company or involved with taking the company public, index inclusion is really desirable for shareholders, for the company.

The group that it's not so great for is the index fund investors who are potentially left holding the bag. Now, it tends to be a small portion of the index that we're talking about here. It's a tiny little bag, but it's still a bag, that they're left holding.

Why do we see this happening? This doesn't have to be an irrational, inefficient markets thing. Lubos Pastor has a paper that I'm pretty sure we talked to him about when he was on our podcast.

There are rational reasons for there to be waves of IPOs. Companies go public basically when they think they can sell their stock at a high price, which doesn't mean anything inefficient or irrational is happening. It's just for whatever reason, their company has a high stock price at that time.

That means for the public market investors, when these companies go public, they have, by their own evaluation, a high stock price. Public market investors buying the stock in the secondary market get the opportunity to invest in these companies when they're, if we wanted to use the word overvalued, here's where we would use it. At the very least, we could say when they have low expected returns is when you get to buy.

Dan Bortolotti: It gets to the heart of the fundamental reason why index funds were created. You touched on this. The whole point of the index fund is not to be arbitrary, but to represent the market.

If it's going to do that, then it needs to make some sort of accommodation for IPOs, even if historically their returns have been lagging. Somebody in the community posted a funny meme that said, "if you're going to buy the haystack, you need to buy all of the hay." That's a reference, of course, to Bogle's comment that instead of looking for the needle in the haystack, just buy the haystack.

I think it's important for us to just be careful before we go down the rabbit hole that anytime you deviate from the basic premise that an index fund is designed to replicate the entire market, you got to be really careful about imposing rules that deviate from that fundamental philosophy. It's not to say that there can't be any rules. All of the major indexes impose some rules for specific reasons, whether it's float or length of time being listed publicly, liquidity, all of those things.

Those are done for reasons to protect investors, but they're not done because they think certain companies will outperform other companies, which is just a forecast. I think it's just really important to keep that in mind as we go forward.

Ben Felix: I would say those considerations are done to make the indexes replicable by index funds, but they're not done to give it better returns or anything like that. It's just like, okay, we want this index to be a representation of the market, but we also want it to be investable. Therefore, we're going to make sure stocks are liquid and whatever other criteria they choose to include in that specific index.

Dan Bortolotti: In the old days, I guess when indexes were nothing but benchmarks, then those considerations were less important. Now that indexes are not just benchmarks for other funds or other managers, they're actually investment strategies as well, then they do need to be investable for all of those reasons. Those rules are there for good reasons, but as you said, Ben, they're not there because the index providers think that they will enhance returns.

Ben Felix: We left off there with IPOs have low expected returns. Companies go public when they think their stock price is high, when they can get a good valuation for their business, which means if you're investing in IPOs on the secondary market, you might expect low returns from those investments and index funds, just by nature of the reason that they exist, tend to invest in IPOs on the secondary market. Although when we talked to Jim Rowley from Vanguard, they mentioned that they do try to get IPO allocations when possible, but even then, Vanguard's not going to get a big enough IPO allocation to fill what they need in general for a newly listed company, just because their funds are so big.

I think in general, we can say index funds are buying these shares on the secondary market, which doesn't tend to look so good. Again, we'll come back to those data in a minute. If you're an index fund investor, I mean, you probably don't love the idea of buying overpriced stocks, but index funds do it because they're representing the market.

They gobble up whatever gets included in the index, regardless of its price. The IPO inclusion rules do vary across indices. This is important.

As of right now, as of the time of recording, the S&P 500 does require a stock to have been trading on a public exchange for 12 months before inclusion. As of right now, and this is one of the things there've been some rumblings about changing, although these are unsubstantiated anonymous source type information, but apparently S&P is considering changing their inclusion rules for some of these big IPOs. As of right now, factually, they do require 12 months of trading before inclusion.

That's S&P 500, which is a subset of the S&P 1500 Composite. Now that S&P 1500 Composite has a different set of rules than the S&P Total Market Index. The S&P Total Market Index allows for inclusion of IPOs within five days for stocks that meet certain criteria.

Pretty interesting. Two very different methodologies, even within S&P indices. Now that, within five days, that near immediate inclusion, that's called fast-track entry.

That's a concept that is pretty important to understand on this topic. Basically, stocks that meet certain criteria can be eligible for near immediate inclusion in some total market indices. I mentioned S&P 500 has historically required shares to trade for a year.

Yeah, there's this article from Bloomberg saying that S&P may be considering an S&P 500 rule change to accelerate the inclusion of some of these big IPOs like SpaceX. When I wrote these notes originally, NASDAQ was considering, so I had my notes in past tense, but they've since adopted similar changes for the NASDAQ 100 to accelerate inclusion of some of these big IPOs. We can talk more about the details of those changes.

There's some interesting stuff there. The implications for index fund investors are pretty important. This paper that I want to talk about comes from Marco Sammon, who we've had on this podcast and talked to him about this paper on the podcast.

His 2025 paper looks at how fast-track entry into CRSP, so that's the Center for Research and Security Prices, indices affects stock returns and IPO deal structure. This is fascinating stuff. Index funds have become so big that index inclusion affects stock prices.

You can see that, but it actually affects the structure of IPO deals. It's just crazy, these sort of second order effects of the growth of index funds.

Dan Bortolotti: It's like the tail wagging the dog. The index fund is created to mirror the market or represent the market, but the market is evolving to squeeze itself into the index fund.

Ben Felix: Which is crazy. A big part of this topic and why it's so interesting is that there's been some speculation that, as I mentioned, S&P and we know NASDAQ did change their rules. There are two ways you can interpret that.

One way is that it's nefarious, in the case of NASDAQ at least, that they're changing their index rules so that their funds tracking their index, like the NASDAQ 100, will buy SpaceX stock. They're doing that to curry favor with Musk to get SpaceX to list on their exchange. That's the sort of bad intent view.

The noble intent view is that, well, these are massive companies and again, why do indexes exist? To represent the market. Of course, you want to have a massive company that has listed on the market included in your index as soon as possible.

That's the noble intent view. Anyway, VTI, which is the massive $2 trillion index fund that I mentioned earlier, that's a Vanguard US total market fund. It tracks the CRSP US total market index.

Now, CRSP is another index that adds eligible securities to the index within as few as five days for fast-track entry. Marco Sammon and his coauthor in this paper show that the expected index investor demand for IPO shares causes fast-track IPOs to outperform their non-fast-track counterparts by over five percentage points following their listing. They list, they pop as tends to happen, so their price increases relative to their listing price, but the fast-track inclusion stocks pop more.

They outperform by more. Now, this is the interesting part. The outperformance peaks at the index inclusion date and then reverts significantly within two weeks.

What's happening there, basically 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 inclusion. Then the index funds end up holding the shares as they revert back down closer to their IPO price. They're getting front run, basically.

The index fund investors are paying what the authors of this paper call a shadow tax. It's like ticket scalpers for concerts and sporting events. Same idea.

Dan Bortolotti: The idea here is that this is probably not an enormous obstacle for moderately sized IPOs. The size of them relative to the index fund, the share that it takes in the index is likely to be so small that it's not a huge issue for index fund investors. What's changing here is the size of the companies we're talking about now.

SpaceX is several orders of magnitude bigger than any recent IPO. What used to be, let's call it a relatively trivial observation, is no longer so trivial and could actually create some significant issues, at least in theory. That's the concern. Is that fair?

Ben Felix: That is fair. There's another paper that I'll talk about later, which is another Marco Sammon paper. This front running IPO paper doesn't put the number into basis points.

Maybe I could have tried to figure that out. They don't talk about that. They put a dollar figure on it.

Anyway, their other paper that we'll talk about later, not just for IPOs, but for IPOs buybacks, like all the different market composition changes. That's where they estimate a 50 to 70 basis point drag relative to an index that delays making those changes. We call it 50 basis points and that's from all the smaller midsize companies that are making changes and whatever, corporate actions and secondary seasoned equity offerings, all that kind of stuff.

To your point, Dan, these companies are so much larger relative to the index that whatever effect we've seen historically, these ones would amplify it. Not actually though, because CRSP, just to use that as an example, if we look at SpaceX, there are two things. I'm getting way ahead of my notes here, but there are two things that are really important.

One is the float. What proportion of the shares are available to trade on the public market, freely available to trade? CRSP waits by the free float.

SpaceX, apparently, there was an article in the FT saying that SpaceX was aiming for a $1.75 trillion valuation. Although I saw today a headline that they're aiming for a $2 trillion valuation now, which is wild, but they're only going to float 5%. At 1.75 trillion, that's an $88 billion free float. CRSP waits them as an $88 billion market capitalization company. In the case of CRSP, they would exclude them entirely because CRSP has a 10% float cutoff. It's like we're talking about this and say, yeah, these are big companies, but how does CRSP actually include stocks?

I don't think it's relevant at all, unless we assume that they're going to go public with a higher float.

Dan Bortolotti: I think that's a really important point to stress. You touched on it earlier, Ben, when you said it seems like people are always looking for the fatal flaw in traditional indexing. These are structural inefficiencies.

They're not ideal. If we could snap our fingers and make them go away and smooth them over, then sure, we would do so. But we can't do that without all kinds of other knock-on effects that are likely to be more detrimental than any improvement we might get by changing this specific rule.

We always have to be very careful that just because we're talking about this as an issue, as a genuine concern, we're not saying abandon your strategy if you're a committed indexer because now all of a sudden it's fatally flawed. That's the wrong takeaway from any of this.

Ben Felix: Yeah, I agree 100%. My title may have been too dramatic. I hope I didn't scare anybody off of index funds.

It's maybe worth mentioning quickly that in this IPO paper, I didn't have this in my notes, but Marco talks about the solution maybe being that companies give index funds a predetermined significant IPO allocation, and that helps to let the company that's raising capital keep more of the price increase. They might be able to raise more at a higher price by pre-agreeing with index funds how much they're going to buy. Because right now it's the intermediaries that are taking a big chunk of that price increase in the secondary market.

Anyway, it's just an interesting tangent about what a potential solution to address that inefficiency could be. That's IPOs and index funds buying IPOs, potentially pushing up their price, leading to lower expected returns, all that stuff. Another important index definition, I just mentioned it, but it's proving to be relevant to these mega IPOs is the concept of free float.

A free float is the proportion of a company shares that are available for purchase in the public equity market, freely available for purchase. A company director that's required to hold shares, for example, would not be included in the free float. Then there are a whole bunch of other criteria like that.

Most major indices, as I just mentioned with CRSP, have a minimum float requirement, and they weight stocks by their public float. NASDAQ 100 is an exception to that. We can talk more about that in a minute.

A company could go public while only making a small portion of their overall market capitalization freely available on public exchanges, which is often the case. Companies will tend to have 20 to 30% or something like that as a public float. Some of these companies, I mentioned the FT article, it's speculated that these companies are going to go public with low public floats, like as low as 5%.

As I mentioned before, at a $1.75 trillion valuation for SpaceX, the total market valuation at a 5% float, their weight in the eyes of indices is 88 billion, not 1.75 trillion.

Dan Bortolotti: Pretty big difference.

Ben Felix: It's a huge difference.

Dan Bortolotti: It fundamentally changes the issue too, doesn't it?

Ben Felix: 100%. When we're talking about, oh, these companies are so much bigger, this makes this issue magnified. Well, yes, if they floated 100% of their equity, yeah, it's a huge difference.

If they float 5%, it's a non-issue. If they float 10% and they're able to enter the index at all, okay, now they're a whatever, one of the biggest companies that's ever existed.

Ben Wilson: When investors are thinking SpaceX is going to have a big impact to the index, it may be you're fearing what the headlines are saying without actually understanding the actual implication.

Ben Felix: Yes, but, and there is a but, so NASDAQ did change its rules and I'm going to talk about that in a second. A lot of the headlines are about the index providers considering changing the rules to accommodate these big IPOs. You're right, Ben.

As of right now, this is actually not that much of an issue. Unless you're investing in the NASDAQ 100, which you probably shouldn't be doing anyway. That's a whole other topic for another day.

NASDAQ, when I originally wrote these notes down, they did have a 10% minimum float and they weighted stocks based on the value of all listed shares of the company with no regard for free float. That's pretty interesting, but they had this whole index consultation process, which some other index providers are also doing publicly, like FTSE is in the process of a public consultation right now. They're requesting people to write in about potentially making changes to their indexes.

S&P, as I mentioned, is apparently considering doing this, but they haven't made a public consultation as far as I know. NASDAQ though was an outlier. They did have a minimum float, which was not an outlier, but they valued for weighting companies in their index.

They use the total capitalization with no regard for free float. Now in their consultation, one of the things they changed, or well, a few of the things they changed, they did eliminate the minimum float. Now you could have a 1% float and technically be included in the NASDAQ 100 index.

Then they introduced a float factor in their weighting of low-float stocks. I want to talk a little bit more about that because, Dan, you and I were chatting about this before we started recording. A lot of the speculation about NASDAQ making these changes was that they were trying to change things to increase the weight of low-float companies in their index.

NASDAQ actually calls this out specifically in their concluding remarks, summarizing their consultation process. They say, "Some respondents in their analysis of the impact appeared to assume that the index, that the NASDAQ 100 index, is currently free float weighted. However, this does not reflect the current methodology.

As noted in the consultation, index constituents are currently represented at the full market capitalization of eligible listed shares without regard to free float considerations. Accordingly to the proposed low-float security weight adjustment, not to exceed the full listed market capitalization would represent a more conservative weighting approach than the one currently in place, rather than a more aggressive one." They've limited the 10% cutoff for minimum float, so it'll take any level of float, but they have adjusted the way that they weight securities to be more conservative for low-float stocks, not more aggressive, which is different from a lot of the perception while they were in their consultation process.

Dan Bortolotti: It goes some way to reducing this enormous concentration.

Ben Felix: Right. We'll take your low-float securities, but we're going to weight them more conservatively than we would weight a typical security. They did change the rules, and they did change them in a way that would allow companies like SpaceX to be included in the index, which would not have previously been possible.

They also sped up the inclusion. They shortened the timeline for how quickly an eligible company can be included in the index. I mentioned earlier that the cynical view here is that NASDAQ is changing the NASDAQ 100 index rules to win SpaceX over in an effort to get their listing.

There was a bunch of articles on that speculating this, and it's plausible. Fine. That's because including a stock like SpaceX in the index would force significant index fund buying, which likely ends up being good for SpaceX, good for SpaceX's early investors, good for NASDAQ if they get the listing, but potentially comes at the expense of NASDAQ 100 index fund investors if they end up buying a high-priced stock that ends up having poor returns afterwards.

Dan Bortolotti: It's a conflict of interest that probably should be considered.

Ben Felix: I agree. It's a conflict, yeah.

Now, we've already talked about this at some length, but the CRSP US Total Market Index, for example, tracked by VTI, does, as of now, continue to have a low-float cutoff of 10% for fast-track entry. If you're invested in VTI, this is a non-issue at the current moment in time. Between inclusion criteria and index weighting methodologies, there's quite a bit of uncertainty about how these mega IPOs will initially show up in indices.

Over time, what tends to happen is the free float tends to increase and whatever, whatever, and the seasoning happens. In three years, all of these companies probably are included in the index, but the big concern about buying high-priced IPOs in the secondary market and then having them tank, it's not clear how problematic that's going to be for a lot of index funds. Over a longer period of time, as I just mentioned, these listings will change the public market.

To reiterate, that's why index providers are considering making these changes to get these companies represented in their indices sooner. Indices are meant to represent the stock market. If all of a sudden, there's this massive new company listed on the stock market, yeah, the indexes probably shouldn't hold it.

They're not designed to be investments. They're designed to represent the market. Putting that in context, this is pretty interesting.

There's a blog post from S&P where they show that SpaceX, OpenAI, and Anthropic, three of those big private companies, at the time of writing the post, which is fairly recent, those companies would make up 2.9% of the S&P world index at their full market caps. That's like full free float or just whatever, their full market cap. That's almost as much as Canada, three companies, three newly listed companies, which is pretty crazy.

As I just said, that was their total market cap, so no consideration for free float. Now, since a lot of these companies are expected to have low public floats, I think that has to be accounted for in estimating their impact on the overall market. There's another post from MSCI where they calculate the potential changes to the MSCI All-Country World Investable Market Index in the event of some of these big companies going public in 2026.

Now, this was written back in February 2026 when SpaceX, they had a modest valuation of only 800 billion. Now, I mentioned it's expected to be 2 trillion. I think the general points are still relevant.

Kind of crazy, whatever that is, two and a bit X their valuation in the course of a couple months. That was pre the xAI acquisition. Part of that is just them acquiring xAI and their valuation increasing on that basis.

I think it's probably like a two X even over that combined valuation anyway. This blog post from MSCI asks what would happen to the index, to this MSCI All-Country World IMI Index, IMI, Investable Market Index. It's pretty much all stocks that exist.

What would happen to the index if the 10 largest companies from the MSCI All-Country Venture Backed Private Company Index went public? Now, they comment that since the free float at the time of listing is unknown, as of now, we'll know when they list. They go through a few different scenarios.

At a 5% float, which again is what SpaceX is expected to go public with, only four of the 10 large private companies that they're looking at would actually achieve index inclusion based on MSCI's inclusion rules. Again, we come back to that case where not all of these companies would be index eligible. MSCI has different criteria than CRSP or S&P, but based on their rules, four of the 10 would be eligible at a 5% float.

At a 10% float, seven of the 10 companies would achieve index inclusion, but they'd be pretty small weights in the index. There's a chart that we can hopefully include in the video that shows the ranking of these companies in the market by size. What's interesting is that while the overall market weights in percentage terms would not be huge, even in a 25% float scenario, MSCI finds that the dollar flows just for funds tracking MSCI indices would be huge with newly listed private companies receiving billions of dollars in investment and the largest existing public companies seeing billions in outflows.

I think those flows are really what matter to index fund investors because even a small percentage change, if it's billions of dollars changing, moving from one equity to another, that's kind of what matters for the index funds who are being forced to buy and sell shares. I think there are probably some interesting tax considerations here too. I don't know enough about how exactly that would play out with US listed ETFs because they do have some mechanisms to reduce tax, but this would be a lot of buying and selling.

That'll be interesting to see how that plays out too. Just to recap, index funds, depending on the rules of the specific indices they track, may or may not invest in these mega IPOs. Even if they do, it's likely going to be at a weight reflecting their public float, unless we're talking about the NASDAQ 100, which as of recently would use its newly adopted float factor, which again is more conservative than their previous methodology of using the total market capitalization. That's kind of where we're at.

Ben Wilson: On your YouTube video, I noticed many comments about why there are rules if we're just going change them to include companies like this. What's your take on that, those questions?

Ben Felix: The market changes. It's not normal. Take the S&P 500.

Normally, a company that goes public, it wouldn't even be a consideration that that company may make it into the index because it wouldn't be big enough. It's the 500 leading companies in the US. Well, a newly listed company is not going to fit that criteria, but now we're in a world where, companies are staying private longer.

They're going public when they're much bigger. If I'm S&P, yeah, I'd be considering making changes too. If you want to represent the 500 leading companies in the US market, well, just because it hasn't been listed long enough, I don't know if it makes sense to exclude it.

Ben Wilson: Yeah, it's interesting. It makes sense. These are massive companies and a very rare situation when they're at IPO time, I would expect. This is not a normal thing to see in the market.

Dan Bortolotti: There've been some other changes. The one that comes to mind I can think of is the S&P TSX capped index that is a non-issue today, but the rule, I think it's probably still part of the index methodology in Canada that no company can represent more than 10% of the index and no company in Canada currently is very close to that. But that goes back to the old Nortel days in the late 90s, early 2000s, when one company represented more than 30% of the index and they said, we get it.

The index is supposed to represent the market, but this is really a pretty egregious bit of word diversification with a single company representing one third of the country. We're going to put in this rule because it just seems sensible. Now, is it arbitrary?

Maybe. Is it defensible? I think so.

It's basically a circuit breaker. It's not really there to shape the index on an ongoing basis. It's just there as a guard in case something gets really inflated and presents an unusual concentration risk to index investors.

It seems like it's kind of motivated by the same thing. The rules almost always work, but when some really strange situation comes about and you've got an IPO valued at $2 trillion, something that's never happened before, that maybe it's worth at least questioning the original rules and tweaking them. That makes sense.

I'm not saying that they're always going to make the right decisions, but it does seem reasonable to revisit them.

Ben Wilson: Yeah, that makes sense. Don't just ignore something when a $2 trillion company is about to IPO. Pretty substantial event.

Ben Felix: For sure. There's a couple of things that I want to add here. One is I'd be very interested, Dan, to see the S&P TSX Composite and Capped Composite side-by-side, but free float adjusted.

Because S&P didn't start float adjusting their indexes until 2005, I believe. I could imagine that Nortel would have had a lot of closely held shares. They had a lot of shares in their pension plan, for example.

I'd be interested anyway. I wonder how much free float adjustments mitigate that concentration risk in the index.

Dan Bortolotti: In other words, it would not have represented such a large share had they had that free float adjustment in place in the past. Yeah.

Ben Felix: That's my hunch, because that was in late 90s that index concentration got so serious in Canada. I know that they changed to float adjusted weights in 2005. On the idea of changing index methodologies, that's a huge one.

S&P in 2004, they announced that in 2005, I believe, that they would start free floating. Prior to that, they were not using free float weights. I found an article about this from 2004.

It's all focused on the sense of most index users is that float adjustment reduces the costs of running index funds and ETFs because stocks with less float and therefore less liquidity have lower weights in the index. Index users also feel that basing the index on available shares instead of total shares means that the index is a better reflection of the market and through the market of the economy.

Dan Bortolotti: I would agree with that. Shares that are not available to the public is not really what most of us mean by the market. The index is not supposed to represent the economy.

It's supposed to represent the stock market. The stock market doesn't really include shares that don't trade. That makes good sense.

Ben Felix: It's actually super interesting. I wish I'd looked at this earlier. In an October 2003 concept paper prior to announcing the decision to move to float adjustment, S&P highlighted reasons against the switch.

"We looked at the academic and theoretical basis for indexing but found no arguments for or against float adjustment," said Blitzer. Side note, David Blitzer was an early guest on this podcast when he was still with S&P before he retired. It's an episode worth checking out if you want to hear more about some of the inside baseball of how indexes are created and managed.

This is more quote from David Blitzer. "Increased interest in investing outside the US seems to have raised the awareness of float issues in foreign markets where cross holdings and strategic holdings by governments or founding families are more common than the US." That's also interesting.

On the topic of indexes making changes to reflect changes in the market. I think as this article also points out, changes in how indexes are being used by investors. I think we heard about that when I was in New York and talked to Jim Rowley and Tim Edwards.

They talked a little bit about this, just about how index providers and index fund providers work together to figure out what the index should look like. Then I also wanted to mention, this episode is coming out the week after we had Tim Edwards on the podcast who is the Managing Director and Global Head of Index Investment Strategy at S&P. He also had a bunch of comments just on, I asked him about that.

Why would an index provider change to accommodate these big companies? He had some interesting stuff to say. That was a big tangent there.

Lots of fun though. Why does all this matter? Why do we care about index inclusion of IPOs?

A big piece of understanding why we're even talking about this is understanding that investing in IPOs on a secondary market is one of the worst investment strategies that you could possibly employ. They tend to have a first day pop where the price on the public market jumps up relative to the IPO price, but most investors don't get the IPO price. Getting an IPO allocation, especially in hot IPOs like this is really, really hard.

Even if you get one, it's not going to be as big as you hoped it would be. Then investing in the shares once they're listed on the public market has been rough to say the least. They're the consistent pattern of IPO underperformance.

Even has a name, named by Jay Ritter, who's also been a guest on this podcast, they called it in a 1995 paper, the "new issues puzzle." They had looked at companies issuing stock. This is IPOs, but also seasoned equity offerings.

Companies issuing stock from 1970 to 1990 tended to be poor investments. In this paper, they find that investors in IPOs receive average returns of only 5% per year, while similar listed firms return 12% over the same period. The paper notes that to achieve the same wealth five years later, an investor would have had to put 44% more money into new issues in the sample than into established firms of the same size. Pretty crazy.

Ben Wilson: And hope that they're right.

Ben Felix: And hope that they're right. Yeah, I guess that's true.

Ben Wilson: You have to make that bet ahead of time without knowing the historical data on that particular investment.

Ben Felix: That is a good point. That's data ending in the 90s. There's a more recent 2019 study from Dimensional Fund Advisors where they looked at the first year secondary market performance of more than 6,000 IPOs from 1991 to 2018.

That actually does pick up right where Jay Ritter's ends. And they find that a portfolio of IPOs generally underperform the market and the small cap index by about 2% per year. The main exception is the 1992 to 2000 period when the IPO portfolio outperformed the small cap index by about 1.1% annually. And that was mainly due to IPOs consisting of small tech companies that their prices took off during the dot-com boom. But we all know what happened after that. So it looks good for a bit, but not so good afterwards.

Dan Bortolotti: If you sold in 2000, you did great.

Ben Felix: Correct. Exactly. If you timed the bubble perfectly. This Dimensional study finds that the poor returns are largely explained by the factors in the Fama and French Five-Factor Asset Pricing Model. The IPO portfolio behaves like a portfolio of small growth, low profitability, high investment stocks, also known as "junk" in AQR's language or "small crap growth," as I've heard it called by some people.

These are types of stocks that they're more volatile and they tend to lag behind the broader market. If you can choose to avoid them, you might want to. A really interesting thing is that Dimensional's paper ends in 2018, but their finding is pretty easy to update and replicate because there are actually two ETFs that invest in IPOs.

They invest in IPOs when they list and they hold them for three years and then sell them. There's the Renaissance IPO ETF, which exclusively invests in large US IPOs. As I said, they hold them for three years and then sell them.

It has underperformed VTI, which just tracks the total US market by more than six percentage points annualized since inception in October 2013. As expected, if you run a quick regression, which I did in Portfolio Visualizer, it behaves like a portfolio of small stocks with high prices, low profitability and aggressive asset growth. Then there's another one that has international stocks.

This one has been listed since 2014. Its ticker is IPOS, which I think is quite a comical or unfortunate ticker choice. It's also underperformed by a wide margin relative to just an index.

You can also see similar underperformance if you look at Jay Ritter's data. His data from 1980 to 2023 shows similar underperformance. That's just a broad picture of IPO data.

There are different ways you can slice it and I'll talk about that from a couple of different perspectives in a minute. But first, I want to talk about low-float IPOs. Before I do that, do you guys have any comments?

Dan Bortolotti: It seems to me your strategy, Ben, is buy the index, short the IPO ETF. That's not investment advice. It's just an observation.

Ben Felix: Not bad. Maybe Mark McGrath can do that in his son's, whatever that is, RESP. Ripple leveraged in his RESP.

I'll send him a message. He's got a new idea. More realistically, and we'll talk about Dimensional in a second.

Dimensional just excludes those types of stocks. It's even more nuanced than that because not all IPOs are necessarily bad. Let me keep going in the flow that I have this written down.

Those are IPOs. They kind of suck as investments in a secondary market. They're great if you're a holder of the private company shares.

They're great initially. The problem for employees of companies is they tend to have lock-up periods. If you have to wait, whatever, a long period of time, you don't usually get to participate in that pop.

But if you held the shares and for whatever reason, don't have a lock-up, the IPO is kind of great. But if you're buying in the secondary market, not as great. Low-float IPOs.

We talked earlier about what float means. SpaceX is probably going to go with a low public float and some of the other companies may also do something similar. If we look at low-float IPOs in particular, the data look particularly bad.

Just to reiterate from earlier, a low-float IPO means that only a small portion of the company shares are available for public trading. That can amplify price swings because demand is concentrated on a relatively limited supply. That's kind of what we're expecting to see from some of these big private companies.

There's another way to slice the data here that's important. Low-float IPOs for high revenue companies, because SpaceX and OpenAI, they are generating large revenues. Low-float, high revenue or high sales is pretty rare, but not unheard of.

I have been emailing with Professor Jay Ritter about this for a bit now. He did send me a table that we can show in the video. I saw Bloomberg report on these data, but I hadn't seen the table anywhere.

I'm pretty sure that our viewers here are getting a pretty exclusive look at some neat data. Professor Ritter found 11 low-float, so again, below 5% public float IPOs for companies with inflation adjusted trailing 12 month sales of 100 million or more. Ten of the 11 IPOs underperformed the market within three years, with average underperformance of roughly 50% relative to the market from the offer price, and 60% from the first day close.

We see there actually was a pop, because if you bought it the first day close, you did worse. It doesn't look good. It looks worse than the average IPO.

When I was emailing with Professor Ritter, he also mentioned that these examples, yes, they had low-floats. They also tended to have high price-to-sales ratios at the time of the IPO. Now, again, that's relevant for these current potential mega IPOs.

If SpaceX were to achieve its $1.75 trillion valuation, let alone its $2 trillion valuation that I've seen more recently, it would have a price-to-sales ratio of more than 100 times based on trailing sales. Wild. Why does that matter?

Professor Ritter also showed, and this is one of the things that's not in my video on this, Professor Ritter also showed me the data for all IPOs, so not just low-float IPOs anymore, all IPOs sorted on their price-to-sales ratio. Measured from the first close, the market adjusted three year buy and hold return decreases with an increasing price-to-sales ratio for IPOs of companies with sales over 100 million. No surprise, I guess, valuations matter even for IPOs.

What does the price-to-sales of 100 times mean? Just for context, the highest price-to-sales ratio for a public S&P 500 constituent is Palantir, which at the time that I wrote these notes had 73 time ratio, price-to-sales of 73. The index as a whole, the S&P 500 trades at a price-to-sales of 3.1 times. Now, in general, as listeners know, high valuations are associated with low expected returns and these current private companies seem to have very high valuations or are expecting very high valuations when they list. For index fund investors, the problem is pretty complicated. Large private companies go public with high valuations.

They're going to change the landscape of the broader market. Now, in response, we've talked about indices have to rebalance to remain reflective of the broader market. That's why they exist.

Market cap weighted indices will rebalance in response to stock market composition changes, which includes a whole bunch of things, including buybacks and seasoned equity offerings, as I mentioned earlier, but also IPOs. In making those changes, indexes and index funds, they're implicitly engaging in a form of market timing. That language comes from Marco Sammon's paper on this topic.

Tends to really bad market timing, though. Again, as we talked about earlier, the issuers, the companies that are listing on the public market, they'll generally want to issue stock when their own company's valuation is high and buy back stock when their company valuation is low. Indexes and index funds, because their goal is to track indices that reflect the market, end up systematically buying high and selling low at the margins.

I want to reiterate, this is not a death blow for index funds. It's just a thing. I'll put a number to it in a second.

In Marco Sammon's 2025 paper, which is now published in the Journal of Financial Economics, which is pretty cool, we had him on before it was published to talk about it. "Index rebalancing and stock market composition: Do indexes time the market?," is the paper. It estimates that that adverse selection, is what he called it in an earlier draft of the paper, but that market timing ends up creating a performance drag of between 47 and 70 basis points per year relative to a delayed rebalancing approach that waits like 12 months, for example, to reflect changes in market composition.

There is a lasting negative effect on index fund returns that could be avoided if index funds delayed rebalancing. If they prioritized expected returns rather than tracking or to an index. If an index did this, they'd have massive tracking error to the index.

I mean, there wouldn't be an index fund basically at that point. That tracking error would be sad. As listeners know, I'm a huge fan of index funds, but as listeners also know, we don't use them.

The assets that I oversee at PWL, we use Dimensional funds rather than index funds. I personally don't invest in market cap weighted index funds. I mean, there are a bunch of reasons for that, but this is one of them.

Dimensional waits six to 12 months after a company lists before considering including it in their portfolios. Dimensional also intentionally tilts away from what I called the "junk" earlier that IPOs tend to behave like more generally. PWL uses Dimensional funds, but they're not paying us to say this.

I gain nothing from people using Dimensional's products. They have ETFs in the US and their competitor Advantis, which I'll talk about in a second, has products in Canada. I mean, this is not intended to be like a sales pitch.

It's just, there's a company doing this a different way. That's Dimensional. They wait six to 12 months to include IPOs.

It's more complicated than that because they also tilt toward smaller and lower price companies, which have in many cases, and particularly in the US, underperformed. Even if we can say, well, hey, Dimensional didn't pay the IPO inefficiency cost. In the US market, at least, they did underperform because they tilted away from the large stocks that did really well over the last 20 years. Anyway, it's complicated.

Dan Bortolotti: Yeah. As the tireless defender of traditional index funds, again, worth pointing out is that no one's arguing that any of these strategies is free of those structural inefficiencies. Very often, you're just exchanging one set for another when you change investment strategies based on relatively small things like how you weight an index.

These are fairly subtle changes. Sometimes they eliminate some problems and just introduce others.

Ben Felix: There's a play on words there. How you weight and how you wait.

Dan Bortolotti: That's right. The waiting is the hardest part, as they say.

Ben Felix: I agree, Dan. I do want to reiterate, this is not intended to say index funds are bad. This is just part of the indexing lifestyle.

It's a cost. People are worried about this right now because of these big potential IPOs, but this is a cost that index funds have been paying. I don't know for how long.

I think Marco's data in that paper goes back to 1980, if I remember correctly. It's there. It exists, but index funds have still outperformed pretty much everything.

How bad is it really? In my video on this, I mentioned Dimensional as doing things in a way that intentionally avoids the cost that we're talking about with IPOs, which introduces other trade-offs, as you just mentioned, Dan. I got a ton of questions about Avantis.

I did not mention them in the video. Frankly, I did not know how they dealt with IPOs when I recorded the video, and I didn't have time to reach out. I got that question so many times that I reached out to them and just asked.

I had assumed that it was pretty similar to what Dimensional does. Dimensional, again, they wait six to 12 months and then they incorporate the newly listed security after that. Avantis, to my surprise, has no problem including newly listed companies and portfolios if they have enough information on their full set of financials and they trade at attractive prices relative to those financials.

They also mentioned that, well, the aggregate IPO data that we just talked about is terrible. If you sort IPOs on profitability, the more profitable ones aren't so bad. If you're investing in negative earnings stocks at IPO, yeah, you did poorly.

If you sort by profitability, the more profitable stocks, that shows up in Professor Ritter's data too. That was interesting. That surprised me.

They are really just looking at expected returns more so than a blanket exclusion of IPOs. They also noted, when we were chatting about this, that they are totally aware of the issues surrounding index inclusion post-IPO. They try not to be on the same side of indices when they're buying and selling.

They try to be on the opposite side or stay neutral during the rebalancing period. That was interesting. They have their own way of dealing with IPOs, but they're not doing a blanket exclusion or waiting period in the way that Dimensional does.

Ben Wilson: In summary, there's three different strategies that each come with their own trade-offs. No one way is necessarily more right or wrong than the other. It's just trade-off that investors have to accept.

Ben Felix: They'll all introduce their own tracking error, whatever you want to call it. They'll introduce performance differences relative to each other. If we held all else equal, but just had one fund that's going to invest in IPOs within five days, one fund that's going to wait six to 12 months, and one fund that is going to do what Avantis does, all else equal, and just let the IPOs be different, there'd be pretty meaningful tracking error more than any fee differences across the funds, which comes back to the question for the investor.

Marco talks about this in his paper too. Knowing that you're going to introduce tracking error from doing something, you have to have a lot of conviction, knowing that you can live with tracking error, that the expected long-term outcome is good, which is an interesting question, because in the short-term, there's going to be a lot of noise. Excluding IPOs might look really bad over some periods.

Even in the, we'll show the chart for that IPO ETF, there was a period where it was outperforming. If you're excluding IPOs during that period, you're going to look at your decision and be like, man, I was wrong. I think you have to think about what is the long-term expected outcome of this thing, and then acknowledge that because we're dealing with a ton of uncertainty in financial markets, in the short-term, there's going to be a lot of noise, and you have to be able to stick through whatever you have decided to do through the noise.

I think that applies to somebody choosing to use Dimensional funds. It applies to somebody using index funds. It applies right now where people are worried about all these IPOs, but man, if you've been investing in index funds, you've been exposed to this exact thing.

Now, just because it's a big headline is not a reason to bail on the strategy.

Ben Wilson: This comes up all the time. Investor discipline is key. There's so much noise that comes up.

Now we're talking about these mega IPOs, but tomorrow would be something different. Next week, next month will be something different than that. If you're constantly looking for the edge or the downside to protect against, you're probably going to end up worse off if you keep changing and adjusting your strategy.

It's better to just remain disciplined to a tried and true strategy that you're committed to for the long-term.

Ben Felix: Agreed. The last little segment I have here is index funds in private markets. With companies staying private longer and going public when they're larger, I think it's a natural question to ask whether investors should be seeking exposure to private company shares before the companies go public.

There are a couple of things to think about here. There's a huge amount of survivorship bias in private company outcomes. For every SpaceX or OpenAI, which are dominating headlines today, there are thousands of companies that did not grow or failed entirely.

That skewness exists in public markets too, but it's way more brutal in private markets. It's really easy to look back right now and say, oh, I should have bought SpaceX shares. You probably couldn't have, but I wish I found a way to get SpaceX.

There are a ton of private companies that failed over the same period, over the time that SpaceX has been operating and growing to its current size, including other space companies. It's tough out there. Another big thing is that the fees and costs associated, and we talked about this in a lot of detail in a previous episode, the fees and costs associated with private company investments can often absorb the financial benefits of owning private assets.

As we've talked about, that has largely been true with private equity funds in general, which have delivered net-of-fee returns roughly in line with public markets, especially when they're properly matched to comparable public equities. There are some really interesting stories floating around right now about the length that some people have gone to, to buy what they hope are SpaceX shares. There are these things called special purpose vehicles that get created in order to pool investor money together and buy private company shares.

Private companies don't want hundreds of investors on their cap table, so a special purpose vehicle can pool a bunch of money together so there's just one entity that's buying shares. There's one special purpose vehicle reported on by the Wall Street Journal that had a 4% upfront fee with an additional fee of 25% of future profits when the shares are sold. You can get exposure to the shares through this SPV, but how much of the benefits are you actually going to keep?

One of the other things that comes up is that there are questions about who actually owns what because the special purpose vehicle structures and layers of ownership are so complicated that it's hard to know what you actually own. Then there are also stories of just outright fraud in some of this reporting where people were saying they could get access to some of these private company shares and they were actually just stealing the money, which hopefully is not too common. It's out there.

Anytime there's people really want, I think it will create a vector for fraud. People will see something like SpaceX, they'll imagine all the money they can make if they were able to buy some SpaceX shares or whatever company shares at a low valuation and then sell when it goes public, which is true if you can do that. Yes, but unless you're an employee or otherwise have direct access to the company shares, early and direct access to the company shares, financial intermediaries that do have access or are able to get access are not typically going to give you, the end investor, access to an equity like that on terms that are better for you than they are for the intermediary selling them to you.

Financial intermediaries, they don't tend to be in business to give you, the investor, money for free. There are some pretty interesting stories about ETFs that have gotten exposure to SpaceX. There are some like Fidelity.

There are a couple of fund companies, active managers who legitimately participate in fundraising and were able to invest in some of these companies early, which is pretty cool. It'll be interesting to see how that affects the returns of those funds because obviously this isn't their only holding. We'll keep an eye on that.

But there are some ETFs that tried to get exposure through special purpose vehicles later on. There's one ETF that attracted quite a bit of reporting and attention. The ERShares Private-Public Crossover ETF.

It bought into SpaceX through an SPV in December 2024. Now, SPVs are not liquid, not very liquid at least. This ETF, it's XOVR, I think is the ticker.

It's had to deal with some pretty unique practical issues because it's a liquid vehicle. It's an ETF holding a large stake in an illiquid asset. Jeff Ptak from Morningstar has done a bunch of interesting writing on this.

What's even more interesting though, at least to me, is that despite SpaceX reportedly rising in value substantially since this ETF invested in it in December 2024, the fund has actually lost money in absolute terms and even more so relative to the market since it made that investment. There's a whole bunch of reason for this and Jeff Ptak goes through a bunch of the reasons in an article. A lot of it is just that the other securities, the public securities that are in the ETF have performed quite poorly.

Jeff Ptak, he's the managing director for Morningstar Research Services. People don't know who he is. He wisely notes in one of his posts on this that 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.

I think a lot of investors are so eager to get a piece of SpaceX and some of these other companies. In this case of this ETF, XOVR, they got burned. They ended up losing.

Some good news, and this is also quite interesting, is it was generally difficult to get access to the private company shares that you want. A lot of public companies will make strategic investments into private companies. From that perspective, public market investors are not entirely locked out of private markets.

Google invested in SpaceX in 2015. More recently, EchoStar received SpaceX stock as part of a deal for wireless spectrum. Amazon, Microsoft, and NVIDIA are major investors in OpenAI.

There was a leak of OpenAI's cap table. Microsoft owns a huge portion of their equity. I don't know, man.

The hottest private companies in many cases, public companies who saw potential in that now hot private company have invested in them. If you're a public market investor, you're indirectly or not even indirectly, you're participating in some of those private market successes before they trade on public markets. I think Microsoft stock actually popped on.

It was an OpenAI announcement about their valuation, I think. It's there. You're not totally locked out of private market growth.

Ben Wilson: It just shows the power of sales and marketing when you hear about these different offerings. Fund managers are actually just preying on the desires and interests of investors and creating products that make it sound attractive, but they're either high fees, hard to access, or like this ETF you gave an example of, are going to result in an undesirable outcome. Obviously not guaranteed.

Some people get lucky, but product manufacturers design things like this in a way to profit themselves. Sometimes it benefits the investors, but unless you pick the right one at the right time, you're probably going to be worse off.

Dan Bortolotti: I think this was a really good reminder too that when you own the whole market, you don't have to worry too much about FOMO because I'd made this argument with people before who say, they want to diversify more by buying crypto or AI plays or whatever it is, even real estate. These are things that are not necessarily directly represented in the index, but they are indirectly just by ... I said a minute ago or earlier in the episode that the index isn't really designed to represent the economy.

It's designed to represent the stock market. The stock market is a proxy for the economy. It doesn't always map it directly, but the idea is, to this point here, if you own the total market, you already own a big chunk of Amazon, Microsoft, and NVIDIA, and therefore you also own a big chunk of OpenAI.

There's not a lot more you can do other than own virtually every public company that's available. When you do that, by trickle down, own a little bit of just about everything. As long as you're okay with that, yeah, sure, you can over concentrate in one or the other stock or sector, but if you just want a little bit of exposure to everything, buying the total market index is still the best way to do that.

Ben Felix: I agree. Microsoft owns a huge portion of OpenAI. Does it make sense for you to go out and try your best to find a way to buy more OpenAI?

Do you need to own more than what is represented by Microsoft? I don't know. I guess after the fact now, if you knew to do that a while ago, we can say that, hey, that would have made a lot of sense, but again, as I mentioned earlier, there's a ton of survivorship bias there.

Go back in time 10 years, which private companies should we invest in? I don't know, man. Not so easy.

Dan Bortolotti: It's hard enough to pick public companies. It's harder to pick private ones where there's less information available to make those decisions.

Ben Felix: All right, so my wrap up here, yes, it is possible that these upcoming mega IPOs will affect market indices, especially if these companies end up being fast-tracked for inclusion. Then due to index fund mechanics, index funds will buy up IPO shares at any price, if they're included in the index they're tracking, leading to adverse selection and potentially even making the problem worse for themselves because people know the indices are going to, or the index funds are going to be buying those shares. If you're an index fund investor, I think this is a really important point.

This is a cost that you have been paying and still outperformed most everything. Maybe these cases, as you mentioned earlier, Dan, are a bit more extreme just because of the size of the companies, but this is it. This is part of the indexing lifestyle.

You're deciding to accept what the public market has to offer, which includes investing in IPOs that sometimes have high prices. You can either accept that and carry on, which has been a very successful strategy. I suspect it will continue to be a very successful strategy in the future.

Or you can look at alternatives like Dimensional funds or Avantis funds that we talked about, which have their different methodologies for avoiding IPO flops. Those are also low-cost, broadly diversified, systematic funds. They just have their various ways of not auto-investing in IPOs at any price.

Then the last piece is, no, you probably can't get access to these private companies directly prior to the IPO. You can try and get an IPO allocation. When everyone wants to buy something, either its price or the cost of accessing it is going to absorb a huge portion of the benefit that you think you're going to get from investing in it.

Then as we talked about, you've already got exposure to a lot of this stuff through public companies that have invested in those private companies already. That's it.

Dan Bortolotti: Good discussion. And I think a nice elaboration on the original video.

I think we took it in a few different directions that were pretty productive.

Ben Felix: It helps a lot having you guys here to chat with. I think about that. Is it repetitive to have the same topic on my channel where I just talk about it myself and then also on the podcast?

But even setting aside additions, like the additional information from Avantis and Professor Ritter, I think having you guys giving your commentary and interpretations as we're going through the topic, it just makes it way more interesting and adds a ton of elements I don't have on my own.

Ben Wilson: By the time you've released the video and we record this episode, there's already a bunch of comments on the YouTube video or in the channel that prompts new thinking and questions or clarifications. It's worthwhile. Not everybody listens to both. That's another important point.

Ben Felix: True. We do have one review. I'll read the disclaimer. You want to read the review, Dan?

Dan Bortolotti: Sure.

Ben Felix: We have a review from Apple Podcasts to read.

Under SEC regulations, we are required to disclose whether a review, which may be interpreted as a testimonial, was left by a client, whether any direct or indirect compensation was paid for the review, or whether there are any conflicts of interest related to the review. As reviews are generally anonymous, we are unable to verify if the reviewer is a client or disclose any such conflicts of interest, which there won't be because we don't pay for reviews.

Dan Bortolotti: All right. This one is titled Valuable and Insightful Podcast. Love the podcast and always find the uninterrupted time to listen for content.

Not being a finance nerd, I find some of the topics over my head, but over time my understanding is improving. I appreciate the scientific approach, and listening always puts me in a higher thinking mindset. Love the rent, buy, and happiness index type topics as well.

The banter before and after is great, and really like to hear what Cameron is up to. His gentle nudges for Ben to share are always entertaining. Shout out to Mark.

I really caught on to his dry wit and felt he was a great addition. All the hosts are great. Keep striving for topics from a Canadian perspective as we all get more US influence.

I will say that the disclaimer we're all waiting for has mainly overstayed its welcome at this point. I can listen to the factual one without skipping, but the fun one is only good for a couple of listens.

Ben Wilson: Fair enough.

Dan Bortolotti: Could be time for an in-between version for those who can't easily skip it. Just my opinion. I've also tried to watch the YouTube, but maybe all my Teams meetings at work have soured me on this format for your content.

That being said, the positive educational and informational benefits of your content far outweigh any of my critiques. I will continue to be a fan of Ben, Cameron, and company for as long as we have the privilege to keep learning and listening. Thank you for such great shows. From Jeff in IT from Orillia.

Ben Felix: This is a new review, and Cameron's barely on the podcast anymore. He must have gone back to older episodes.

Dan Bortolotti: But another shout out to Mark. So we got him into the episode a couple of times today.

Ben Felix: Mark and his lasting impact on the podcast.

Ben Wilson: Indeed.

Ben Felix: All right. That's all I have. Anything else from you guys?

Ben Wilson: No.

Dan Bortolotti: See you next time.

Ben Felix: Thanks everyone for listening. And thanks guys.

Disclaimer:

Portfolio management and brokerage services in Canada are offered exclusively by PWL Capital, Inc. (“PWL Capital”) which is regulated by the Canadian Investment Regulatory Organization (CIRO) and is a member of the Canadian Investor Protection Fund (CIPF). Investment advisory services in the United States of America are offered exclusively by OneDigital Investment Advisors LLC (“OneDigital”). OneDigital and PWL Capital are affiliated entities, and they mostly get on really well with each other. However, each company has financial responsibility for only its own products and services.

Nothing herein constitutes an offer or solicitation to buy or sell any security. Occasionally we tell you not to buy crappy investments in the first place, but that’s not the same thing as telling you to sell them.

This communication is distributed for informational purposes only; the information contained herein has been derived from sources believed to be “truthy,” but not necessarily accurate. We really do try, but we can’t make any guarantees. Even if nothing we say is fundamentally wrong, it might not be the whole story.

Furthermore, nothing herein should be construed as investment, tax or legal advice. Even though we call the podcast “your weekly reality check on sensible investing and financial decision making,” you should not rely on us when making actual decisions, only hypothetical ones.

Different types of investments and investment strategies have varying degrees of risk and are not suitable for all investors. You should consult with a professional adviser to see how the information contained herein may apply to your individual circumstances. It might not apply at all. Honestly, you can probably ignore most of it.

All market indices discussed are unmanaged, do not incur management fees, and cannot be invested in directly. Which is a shame, because it would be awesome if you could.

All investing involves risk of loss: including loss of money, loss of sleep, loss of hair, and loss of reputation. Nothing herein should be construed as a guarantee of any specific outcome or profit.

Past performance is not indicative of or a guarantee of future results. If it were, it would be much easier to be a Leafs fan.

All statements and opinions presented herein are those of the individual hosts and/or guests, are current only as of this communication’s original publication date. No one should be surprised if they have all since recanted. Neither OneDigital nor PWL Capital has any obligation to provide revised statements and/or opinions in the event of changed circumstances.

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