SpaceX and major Ai IPOs could create real risks for index fund investors, and some of us may want to reassess the ETFs in which we invest …but the impact may be less dramatic than some warnings suggest.
Index fund investing is built on the idea that we do not need to pick winners. We can simply buy the market. But the market is a list, compiled by index providers. And that distinction may become much more important when SpaceX, OpenAI, Anthropic and other giant private companies come to the stock market at eye-watering valuations. The worry is not simply that these companies might be expensive. It is that passive investors could be forced to buy them after much of the private-market gain has already happened.
In this video by Damien Talks Money, the argument is put starkly. Some are being talked about at valuations in the trillions. At the same time, index providers are adjusting their rules to allow these companies into major indices more quickly. If that happens, funds tracking those indices would have to buy straight away. And that creates a genuine risk for ordinary investors.
Most people who own index funds think of themselves as avoiding stock picking. But they are still accepting the decisions made by S&P Global, FTSE Russell, MSCI, Nasdaq and others. These companies decide what counts as “the market” for the purposes of their products. And those products are commercial products.
That creates an issue. Index rules need to be stable and predictable because huge sums of money follow them. At the same time, index providers compete with each other. They want their indices to look relevant. They do not want to be the provider whose flagship index excludes the hottest new companies in the world.
So when a company like SpaceX lists, the question becomes: does it enter the index, and how quickly?
If the answer is “quickly”, passive investors may end up buying at precisely the moment when insiders and early investors are being given liquidity. That’s the concern: the stock market becomes their exit. Retail investors get to pay the price.
SpaceX is said to be seeking a valuation around $2 trillion. The Damien Talks Money video says that in 2025 it had revenue of $18.674 billion and a net loss of $4.93 billion. On those figures, the valuation would imply a price-to-sales ratio somewhere around 100 times, which is extraordinary by normal standards. Morningstar has just valued the company at only $0.78 trillion.
There is also a wider point about storytelling. SpaceX is being presented with a grand narrative of rockets, Starlink, asteroid mining, Mars, social media, Ai, data centres and even space Ai data centres. It also refers to a claimed total addressable market of $28.5 trillion.
This tells us how big the dream might be, but not how much profit the company will actually make. A large opportunity does not automatically become a large business. A large business does not automatically become a profitable one. And a profitable business does not automatically justify any valuation placed on it.
OpenAI and Anthropic may be extraordinary companies. Their products may be useful, influential and widely adopted. But if they arrive on public markets at vast valuations while still burning cash, index investors face a familiar problem: they may be buying the future after it has already been priced as if it has happened.
For retail investors, that is the dangerous bit. Not because these companies must fail. They may not. Some may become enormous and profitable. The danger is that passive funds could end up absorbing highly priced companies where the risk-reward balance is not what fund investors want.
However, we should be careful not to overstate the effect.
A mega IPO will not instantly destroy an index fund. In a genuinely diversified fund, exposure to one new listing may be meaningful but not catastrophic. The effect will depend on the index. A Nasdaq-focused fund could be much more exposed than a global all-cap fund. A thematic technology fund could be more vulnerable still. A broad world equity tracker should be cushioned by thousands of other holdings. A Socially Responsible Investment (SRI) fund may skip these companies completely.
Timing matters too. Some indices do not add companies immediately. Eligibility rules may include profitability, free float, trading history, liquidity and committee judgement. Some passive funds may buy quickly. Others may wait. There is also a self-correcting mechanism: if an overpriced new listing falls after entering an index, the company’s weight in the index falls too. The loss is real, but it does not necessarily keep compounding forever unless more capital keeps being drawn in at inflated prices.
Index investing is not broken, as some YouTubers are breathlessly claiming, but it is less automatic and less neutral than many people assume.
The rough arithmetic is worth spelling out. S&P Dow Jones Indices currently puts the total market capitalisation of the S&P 500 at about $67.8 trillion, with the largest constituent at 7.9% and the top 10 at 38.5%. On that basis, even a $2 trillion SpaceX would only be around 3% of the S&P 500 if it were fully indexable at that valuation. In a broader global index, the effect would be smaller still. MSCI says its ACWI IMI index has an index market cap of about $109.1 trillion, so a $2 trillion company would be around 1.8% of that global investable universe.
There is another important dampener: free float. Major indices usually do not weight companies by their full headline valuation, but by the portion of shares actually available for public trading. If a company lists at $2 trillion but only 10% or 20% of its shares are freely tradable, the indexable value may be closer to $200 billion or $400 billion, not $2 trillion. That changes the fund impact dramatically. A $2 trillion SpaceX sounds like a market-distorting asteroid. A $300 billion free-float-adjusted holding is still big, but in an S&P 500-sized index it is closer to a large constituent than an irresistible black hole. The headline IPO valuation may overstate the immediate exposure for passive investors.
Even if we do imagine three enormous listings at $2 trillion each, the combined number would be about $6 trillion. In simple market-cap terms, that would be roughly 9% of the S&P 500, or around 5.5% of a broad global all-cap style index. That is a very real concentration risk, especially if all three businesses were driven by similar Ai, data-centre and speculative-growth assumptions. But it is also not the same as saying every ordinary index fund would suddenly be overwhelmed by these stocks.
Me? I hold a range of broad global index ETFs, and although I appreciate the risk from these IPOs may not be as dramatic as some people are warning, I’m decreasing my exposure to the funds which will be most affected by them. I use index funds to reduce risk, so if the risk is about to increase, they’re not doing what I want.
Image: Deborah Lupton / Pop Chips / Licenced by CC-BY 4.0