SpaceX: History Shows This 1 Investment Has Outperformed Almost All of the Largest IPOs

After months of anticipation, SpaceX made history as the largest initial public offering (IPO) in market history. It ended its first trading day with a valuation of just over $2 trillion, placing it squarely in the top 10 largest publicly traded companies in the United States.

While IPOs are exciting for many investors, there's also no shortage of uncertainty. With very little public track record, it's hard to say how any IPO will perform over time.

However, looking back at previous large IPOs shows that history offers one clear pattern: They tend to underperform the S&P 500 (SNPINDEX: ^GSPC).

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Historically, many IPOs fail to impress

Of the top 10 largest U.S. IPOs (measured by market value at the time they went public), eight have significantly underperformed the S&P 500. Collectively, these 10 stocks have fallen short of the benchmark index by a median of 127 percentage points, according to data from FactSet Research.

A stock's initial performance doesn't always predict how it will fare in the long term, either. Coinbase Global, for example, surged by 31% during its first trading day. Since its IPO in 2021, however, it's underperformed the S&P 500 by 136 percentage points.

That's not to say all large IPOs perform poorly. Many stocks take time to find their footing, so that often means waiting for a better entry point than buying on day one. But historically, buying and holding an S&P 500 ETF would have been more lucrative than investing in the 10 largest U.S. IPOs as soon as they began trading.

Should you invest in an S&P 500 ETF right now?

It's hard to go wrong with an S&P 500 ETF, especially if you're a long-term investor. This type of investment holds stocks from 500 of the largest and healthiest U.S. companies across all industries, providing diversified exposure to a large swath of the market.

The S&P 500 also has strict requirements that companies must meet before joining the index. Stocks must have been trading for at least 12 months, for example, and they must also pass profitability screens. That means IPOs like SpaceX's will not join the index right away, giving the stock time to settle and prove profitability before it's included in an S&P 500 ETF.

Over the past 20 years alone, the S&P 500 itself has earned total returns of close to 800%. That means if you'd invested $10,000 two decades ago, you'd have more than $87,000 by today, even without making any additional contributions.

^SPX data by YCharts

That said, although the S&P 500 has outperformed many IPOs since they began trading, it still lags many other individual stocks. This isn't necessarily a dealbreaker for all investors, but it can limit your earnings compared with a customized portfolio filled with hand-selected stocks.

No investment will be the right fit for everyone, but the S&P 500 ETF is a powerhouse investment with a stellar track record. For many investors, that makes it a long-term portfolio staple.

Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FactSet Research Systems. The Motley Fool recommends Coinbase Global. The Motley Fool has a disclosure policy.