IPOs and Index Funds: The Evolution of a Shifting Landscape

July 07, 2026

As a fiduciary firm dedicated to your long-term financial clarity, we continually monitor the structural forces shaping the markets. This month, we are taking a look at the Initial Public Offering (IPO) ecosystem, and how it is impacting index fund investing.

Over the last several decades, an unprecedented surge in private venture capital has fundamentally shifted capital formation, changing both how long companies stay private and how they are valued when they finally list on public exchanges. Mega IPOs like SpaceX have prompted highly visible shifts among index providers. Major benchmarks are rewriting their rules to capture newly public companies faster than ever before—a structural evolution that carries important implications for your passive portfolio.

An IPO is when a private company sells new shares to the public for the first time, typically on exchanges like Nasdaq or the New York Stock Exchange, with investment banks helping value, file, and market the deal. The proceeds usually fund expansion, R&D, or debt reduction, and because the company is issuing new shares and raising capital directly, an IPO is a primary market transaction, unlike secondary market trading between investors.

The Changing IPO Landscape

One major development in the modern IPO market is the age at which companies go public. In 2000, the median age of a company listing on a U.S. exchange was just 6 years.¹ By 2025, that age doubled to 12.

A primary driver of the delay comes from the rise of venture capital.² The structural landscape of capital formation fundamentally shifted with the National Securities Markets Improvement Act (NSMIA) of 1996.³ By preempting state-level regulations and expanding exemptions for private investment funds, this deregulation allowed private equity and venture capital to pool massive amounts of capital from qualified purchasers. By the early 2000s, venture capital firms were raising annual sums in the low tens of billions. Since 2020, the industry has raised over $1 trillion, providing capital to thousands of private companies across the U.S. Backed by abundant private capital and eager to avoid the regulatory burdens of public markets, companies are choosing to stay private for longer.

This delay has important tradeoffs. On one hand, it can worsen wealth inequality by reserving the biggest early gains for wealthy investors and institutions, while reducing transparency by keeping fast-growing companies outside public disclosure rules. On the other hand, it can also protect retail investors from the high failure risk of early-stage companies, since private capital is better suited to absorb those losses. In that sense, private markets function as a shock absorber, allowing companies to mature before entering the public markets.

Risk and Return

IPOs are exciting. They are major milestones for companies and command a market buzz as the new kid on the proverbial block. Major listings also tend to be oversubscribed, meaning investors request more shares than are available. This can lead to jumps in the price of a newly issued security. In fact, from 2012 to 2024, the average first-day trading increase for an IPO was 25.4%.⁴

However, strong initial jumps can dampen future returns. During the same 13-year period, the average IPO realized a cumulative return of just 14.1% over the three years following its public market inclusion.⁵ Even worse, when you adjust for the size of the IPO, meaning larger IPOs hold a higher weight, the returns fall to a cumulative -18.7%. This points to the largest and most blockbuster IPO underperforming smaller, lesser-known companies.

Part of the reason shares trade down in the months and years following the initial offering is that insiders are selling. Often company insiders are barred from selling shares for a prespecified amount of time after an IPO. Once these restrictions are lifted, many begin to sell part or all their holdings as their shares are finally salable.

Index Adjustments

Historically, major indexes required companies to trade publicly for a period and meet other strict criteria before being included into the index. However, a handful of very large, well-known private companies have prompted index providers to revisit these rules, allowing a few mega IPOs in 2026 to be included sooner.⁶

Some index providers argue that if a newly listed company is already a multi-billion-dollar enterprise with strong investor demand, it must be included immediately to ensure the index accurately reflects the broader market. While this rationale has merit, shortening these “seasoning” periods or relaxing inclusion rules introduces risks. It forces index funds—and, by extension, many Americans’ retirement savings—to absorb the intense early volatility often triggered by initial investment bank misvaluations or the expiration of insider lockup periods.

Throughout its history, the Fed has continuously navigated tension between autonomy and accountability. Legislative changes such as the Banking Act of 1935 strengthened its independence, while periods of war, inflation, and financial stress have tested its limits.⁶

This trend fundamentally redefines what it means to own “the market" via a passive portfolio. The danger lies in the precedent these rule changes establish: companies with inflated private valuations or minimal public ownership (referred to as a free float) can now secure accelerated entry into major indexes. If these aggressive valuations fail to hold post-listing, everyday investors “buying the market”—investors who assume they are buying a diversified, relatively stable basket of equities—will bear the brunt of the downside.

Here is how major index providers are shifting their inclusion methodologies:

FTSE Russell: Now fast-tracks mega-listings, allowing large IPOs to join its indexes after just 5 trading days. Also now allows IPOs with <5% free float/voting rights at listing, provided lockup expirations are expected to clear minimum requirements within 12 months.⁷
Nasdaq: Now allows any IPO ranking in the top 40 by market cap to join the Nasdaq-100 after just 15 trading days, with the traditional float floor removed. Additionally, a new "modified market cap" weighting boosts low-float names by capping weights at 3x their float value, pushing up forced passive buying.⁸
MSCI: Maintained its long-standing 2007-era policy, which automatically allows IPOs in after 10 trading days if the float-adjusted market cap is 80%+ larger than MSCI's size minimum, waiving standard free-float and liquidity screens.⁹
Morningstar/CRSP (often overlooked): Also updated its eligibility screens this year to fast-track low-float mega IPOs into its benchmarks after just 5 trading days.¹⁰
S&P Dow Jones: Stands as the notable exception. S&P kept its strict 12-month seasoning period, GAAP profitability requirement, and minimum free-float rule for the flagship S&P 500.¹¹

The Enduring Power of Passive Investing

For long-term investors, we believe index investing remains one of the most reliable ways to build wealth because of its self-correcting nature. If a highly valued mega IPO enters an index and its valuation later weakens, a market-cap-weighted fund will naturally reduce exposure as the company’s share price and market capitalization fall. Broad-market indexing also helps reduce the concentration risk of any single blockbuster listing by spreading exposure across hundreds or thousands of companies, so the impact of one stock’s underperformance is diluted.

As highlighted earlier, because the average size-adjusted IPO has faced a cumulative three-year return of -18.7% over the last decade or so, trying to pick winning individual stocks or chase opening-day hype remains statistically disadvantageous. Passive indexing bypasses this stock-picking risk entirely while maintaining excellent cost and tax efficiency. It keeps transaction fees low so that more of your money remains invested to benefit from the power of long-term compounding.

To put this diversification into perspective, the mathematical structure of a broad-based index inherently minimizes single-stock exposure. For example, even if a highly anticipated mega IPO debuts at a $100 billion valuation, it would initially account for less than 0.25% of a $67+ trillion broad-market benchmark like the S&P 500. For an individual investor holding a diversified portfolio split between equities and fixed income, that specific company's direct impact shrinks to a mere fraction of a percent. This structural insulation helps ensure that even a severe post-IPO devaluation of a single blockbuster company remains a minor ripple rather than a catastrophic event for a long-term retirement portfolio.

Navigating the New Index Landscape

The IPO landscape is undeniably evolving, driven by an unprecedented influx of private venture capital that has fundamentally altered company dynamics. This private funding, combined with accelerated inclusion timelines from major index providers, means that modern passive portfolios will begin absorbing early public volatility sooner than they did in the past. We saw this structural shift manifest in real time following the historic June 2026 IPO of SpaceX, which raised approximately $75 billion and commanded a market capitalization of $1.77 trillion.¹² Rather than waiting out traditional multi-month seasoning periods, many index funds—and by extension, everyday retirement savings—are now being positioned to navigate the immediate aftermath of mega IPOs.

This response highlights a stark rift in indexing philosophies. While FTSE Russell, Nasdaq, and Morningstar favor immediate market representation by fast-tracking new giants, S&P Dow Jones prioritizes index stability, using strict seasoning and profitability guardrails to insulate investors from early volatility.¹³ Depending on which benchmark your fund tracks, your portfolio is either actively absorbing this high-stakes early trading or waiting for these companies to mature.¹⁴

At One Day In July, we look past short-term market buzz to focus entirely on what serves your financial future over the long haul. While accelerated index timelines introduce a bit more early volatility, these evolving market lifecycles are simply structural shifts to monitor—not a reason to abandon a time-tested strategy. Broad-market index investing remains an efficient, straightforward, low-cost, and historically sound path to long-term financial security. By staying disciplined and maintaining broad diversification, we strive to navigate these marketplace changes smoothly and keep your wealth growing steadily.

One Day In July LLC is an SEC-registered investment advisor. Registration does not imply a certain level of skill or training. One Day In July LLC does not guarantee actual returns or losses. The content of this newsletter is for educational purposes only and is not investment advice. Individual circumstances may vary.

Return to Research

The Changing IPO Landscape

Risk and Return

Index Adjustments

The Enduring Power of Passive Investing

Navigating the New Index Landscape

Form CRS & Disclosures

Accessibility Statement

(802) 503-8280
welcome@onedayinjuly.com

Why The Name?

IPOs and Index Funds: The Evolution of a Shifting Landscape

The Changing IPO Landscape

Risk and Return

Index Adjustments

The Enduring Power of Passive Investing

Navigating the New Index Landscape

Form CRS & Disclosures

Accessibility Statement

(802) 503-8280 welcome@onedayinjuly.com

Why The Name?

(802) 503-8280
welcome@onedayinjuly.com