This year marks 50 years since index investing was first introduced to everyday investors. At the time, the concept drew skepticism. Why would anyone settle for “average” returns rather than trying to beat the market? Today, it’s facing a different kind of test, one defined by a new wave of mega initial public offerings from companies such as SpaceX (formally, Space Exploration Technologies Corp.), Anthropic PBC, and OpenAI Group PBC.
Those IPOs are raising questions about whether index funds will be forced to buy them at scale, exposing them to risks. With several mega IPOs expected in the near term, many index providers are continuing to refine criteria for index inclusion.
Changing IPO Landscape
When indexing began a half-century ago, IPOs looked very different. Offerings were smaller and a larger share of the company was listed and traded from the outset. That’s no longer the world we live in. With the upcoming IPOs, a smaller portion will probably be made available at listing, with additional shares entering the market for public consumption over time. Today’s pipeline of IPOs includes companies with trillion-dollar valuations, placing them among the largest companies in the market.
This shift has fuelled debate about how indexes should incorporate these mega flotations amid claims that IPO structures, and even index inclusion rules, are being engineered to take advantage of passive flows. But that framing misunderstands how indexing works and how markets ultimately absorb supply and determine prices over time.
Core Principles of Index Investing
From the start, index investing rested on a few core principles: broad diversification; low costs; transparency and letting the markets determine outcomes. Those principles weren’t designed for any single era. They were designed to hold up as markets change. And the market always changes.
Over the years that Vanguard has been offering index-tracking funds, methods have evolved in response to those changes. One of the most important adaptations has been the shift towards float-adjusted market capitalization, meaning a company’s weight in the index is based on the shares investors can actually buy, not including shares held by insiders and other private investors that aren’t listed on an exchange.
Float-Adjusted Indexing in Practice
This matters enormously for today’s mega IPOs. A company such as SpaceX may carry a trillion-dollar valuation, but only a fraction of its shares is likely to be available for trading, the so-called free float. Float-adjusted indexing ensures that portfolios reflect what investors can actually buy, not the full headline valuation.
Float-adjusted indexes are not allocating capital based on hype, they are allocating based on investable reality. Even with a relatively small float, SpaceX will probably be the largest IPO to date, so the dollar value available to trade will still be substantial, supporting deep liquidity and efficient price discovery. For most portfolios, the impact may be modest, but in the market, these mega IPOs will probably trade easily from day one.
