Will OpenAI and SpaceX IPOs Leave Index Fund Investors ‘Buying at the Top’?

TradingKey - Recently, artificial intelligence and commercial aerospace have become the two most closely watched sectors in global capital markets. As tech giants like OpenAI and SpaceX are frequently rumored to be preparing for IPOs.

Concerns have begun to emerge in the market: if these companies enter the capital markets at extremely high valuations, will index funds be forced to buy at the top, effectively serving as "exit liquidity" for early investors?

This issue involves the underlying operations of index fund mechanisms, passive investment structures, and market valuation logic.

How do index funds determine buying weights?

Index funds do not engage in active market timing or stock selection; instead, they allocate strictly according to index rules. Using the S&P 500 or total market indices as examples, the core weight calculation is based on "free-float market capitalization" rather than total corporate valuation. Free-float market capitalization refers to the market value of shares available for trading in the public market, excluding shares locked up by founders, management, or early investment institutions.

Therefore, even if OpenAI or SpaceX reaches a total valuation of hundreds of billions of dollars or more at the time of their IPO, their initial weight in the index will be limited if the actual public float ratio is low.

This means there is no simple linear relationship between the buying strength of index funds and a company's total valuation. The notion of "being forced to take over at high prices on a large scale" does not hold up entirely at the mechanistic level.

IPOs do not automatically enter mainstream indices

Another easily overlooked fact is that large companies are not immediately included in core indices following an IPO. Taking the S&P 500 as an example, companies must meet several requirements, including profitability records, liquidity, market capitalization size, and corporate governance structures, before being included as index constituents.

Historically, even Tesla (TSLA) was only included in the S&P 500 ten years after its listing, a process that itself involved thorough market pricing and fundamental validation.

Consequently, even if OpenAI or SpaceX have high IPO valuations, index funds may not necessarily participate in allocation during the initial offering phase. Index inclusion typically occurs after a company's business model has matured and market pricing has stabilized. What index funds bear is not the risk of day-one IPO pricing, but rather valuation levels closer to where market consensus has formed.

Do high-valuation IPOs pose a structural risk?

The current U.S. stock market has shown a trend of high concentration, with the weights of mega-cap tech stocks in indices continuing to rise. Under this structure, if OpenAI or SpaceX lists with massive market capitalizations and is gradually integrated into index systems, it could indeed further increase the weight of the technology sector within those indices.

However, a key feature of market-cap-weighted indices is their dynamic adjustment mechanism. If a company's valuation declines due to insufficient profitability or revisions in market expectations, its weight in the index will automatically decrease. Index funds do not continuously add positions at highs; instead, they passively adjust holding proportions according to changes in market capitalization. This mechanism ensures that index funds bear overall market risk rather than the risk of a single company.

Long-term historical data shows that passive index investing still outperforms most active funds across most cycles. Its advantages stem from low costs, broad diversification, and the avoidance of emotional decision-making, rather than precise judgments on individual IPOs.

Do index fund investors need to worry?

For long-term investors, the focus should be on asset allocation structure and sector concentration rather than individual IPO events. If there are concerns about excessive technology weight, diversification can be achieved through equal-weight indices, value-style ETFs, or international market allocations.

From an asset management perspective, the real risks stem from changes in the macro liquidity environment, reversals in earnings cycles, and the overall contraction of valuation systems, rather than the listing of any single company.

While the OpenAI and SpaceX IPOs may certainly become market focal points, their actual impact on index fund investors will depend more on float ratios, the pace of index inclusion, and subsequent earnings realization, rather than the valuation figures at the time of listing.