We’ve recently received questions about how upcoming large IPOs, such as SpaceX, might affect client portfolios. Below is a concise overview of what’s changing and what it means for your investments.
Historically, newly public companies must meet several criteria before joining major stock indices and the index funds that track them. These typically include 6 to 12 months of trading history, positive earnings over multiple quarters, and adequate trading volume.
However, several major index providers have revised their rules to allow faster inclusion of large, high-profile, and AI-related IPOs:
- CRSP (which many Vanguard index funds track): reduced the inclusion period to within 5 trading days of the IPO
- FTSE Russell (manager of the Russell 1000 and 2000 indices): will also shorten eligibility to 5 trading days
- Nasdaq (manager of the popular Nasdaq-100 technology-heavy index): cut the inclusion period to 15 trading days for IPOs large enough to rank among its largest members
The notable exception is S&P Dow Jones, manager of the S&P 500®, with an estimated $5.4 to $7 trillion indexed to it. S&P has stated it will maintain its stricter 12-month seasoning period and other long-standing criteria.
How does this affect your portfolio?
It depends on the types of funds you hold. Traditional index funds must buy companies once they enter the index they track, so faster inclusion rules may lead to earlier exposure to large IPOs. If you own such funds, it’s worth checking which index they follow and how that index handles IPO additions.
Redwood Grove Wealth Management does not use traditional index funds in managed portfolios (though some clients may hold legacy positions). Our primary equity manager, Dimensional Fund Advisors (DFA), does not track indices mechanically. Instead, DFA aims for broad market exposure while maintaining flexibility around when and whether to add newly public companies.
DFA has historically waited at least one year before considering IPOs for inclusion and has indicated no plans to change this approach.
As a result, client portfolios are generally insulated from early, potentially volatile exposure to mega IPOs. Over time, funds may hold some of these companies, but the impact will likely be modest due to broad diversification.
For those interested, DFA has published research showing that while IPOs attract significant attention, first-day returns are often difficult for most investors to capture, and IPOs have historically underperformed the broader market during their first year.
Finally, we’d encourage embracing a bit of JOMO, the Joy of Missing Out, as it relates to the upcoming and recent mega IPOs. While exciting to contemplate, your portfolio will likely be better positioned by maintaining a disciplined investment approach.