Index Providers Rush to Loosen Rules for Mega IPOs Like SpaceX and OpenAI

The index providers that manage trillions of dollars in retirement accounts and investment funds are rewriting their rulebooks. As SpaceX, OpenAI, and Anthropic prepare to go public, S&P Dow Jones Indices proposed this week that it would scrap the requirement for profitability before a company can enter the S&P 500. It would also eliminate the traditional one-year waiting period. The argument from index managers is straightforward: these IPOs are so enormous that the old guardrails distort their ability to track the market accurately. But there is another way to read it. They are simply giving investors what they seem to want—access to the hottest stocks.

What makes S&P's proposal especially revealing is that it creates a two-tier system. For companies large enough to crack the top 100 by market value, profitability no longer matters. For everyone else, it still does. A mid-sized company going public will languish in limbo until it turns a profit or grows large enough to qualify. A giant company going public gets a free pass. Size, in other words, now confers privilege. Other major indices are following suit or considering similar fast-track rules for mega-cap IPOs that do not apply to smaller ones. The Russell 1000, MSCI, and Nasdaq indices operate almost entirely by formula. The S&P 500, despite its reputation, is actually a hybrid—a committee of humans selects which stocks get in, choosing from a pool of companies that meet certain criteria. This gives S&P discretion that the others do not have.

The consequences of these decisions matter more than most investors realize. In 2020, the S&P 500 lagged the MSCI USA index by three percentage points—the largest annual gap in history—primarily because S&P delayed Tesla's inclusion until December. Investors tracking the S&P 500 missed out on Tesla's eightfold surge that year, a move that added roughly half a trillion dollars to the company's market value. SpaceX, if it reaches the rumored valuation of $1.75 trillion, would become the eighth-largest stock in America, ahead of Meta. Its limited free float—the percentage of shares actually trading, excluding those locked up by insiders—will constrain its weight in indices, but if the stock moves sharply, the timing of its inclusion could prove equally consequential.

The Invesco QQQ, which tracks the Nasdaq-100, illustrates how far index providers are willing to bend. New rules that took effect this week allow accelerated inclusion within 15 days for IPOs large enough to rank among the top 40 Nasdaq stocks. The QQQ also reversed a recent requirement that companies have at least 10 percent free float to qualify. The reason is practical: the QQQ holds over $400 billion in assets. If it had to weight stocks by total market value rather than free float, and a company had only 2 percent of its shares trading, the fund could end up owning half the outstanding stock. To avoid this trap, Nasdaq will weight stocks by whichever is lower: three times the free float or the total market value. This is an improvement over the previous design, which could have resulted in a company with only 10 percent of shares available receiving 10 times the weight it deserved.

Arm Holdings, the British chip designer, will likely be the first major beneficiary. Only a fraction of its shares trade, but old rules about American Depositary Receipts limited its weight in the index. Under the new framework, its weighting could triple when the Nasdaq-100 rebalances next month. The broader pattern is clear: index providers are loosening standards to accommodate the wave of mega-IPOs on the horizon. Investors who want exposure to these hot offerings can already find specialized vehicles, though many leave much to be desired. If the index rule changes proceed as planned, those fashionable stocks will arrive in your ETF whether you want them there or not.