By Telis Demos

Being a passive investor means you don't pick stocks. But you still have to pick an index. And different indexes have different approaches to huge new listings.

Following the addition of SpaceX after its initial public offering to many stock indexes last week, passive investors are suddenly faced with a stark choice in benchmarks. Do they want one that now includes Elon Musk's newly listed company with a rocketing valuation, or one that doesn't.

Surprisingly, the diverging approaches might not make a huge difference for investors who focus on broad-based investment vehicles that keep costs low.

Among some of the largest exchange-traded funds, the Vanguard Total Stock Market ETF tracks an index that will now include SpaceX. But the giant ETFs tracking the S&P 500 index won't have it.

Investors could be on either side of this. Maybe they feel that they are missing out on great companies like SpaceX if their index doesn't have them. Or they might want to avoid overhyped debutantes until the dust settles on the latest IPO boom.

This is a variation on a basic question passive investors face. Should they aim to replicate the whole market, or just the bulk of it? Vanguard's total-market ETF tracks an index with almost 3,500 companies, and which can add IPOs after just a few days of trading. The S&P 500 tracks not only larger companies, but waits much longer after an IPO and has profitability criteria for inclusion.

The reassuring news for passive investors is that, in recent years, it hasn't made a huge difference in returns. For comparison's sake, consider Vanguard's total-market index ETF versus its S&P 500-tracking ETF. Over the past decade through Thursday, the S&P 500 ETF has returned an annualized 15.6%, according to FactSet data. The total-market index ETF has returned 15.1%.

That isn't a huge gap. And it is just one precise interval. Any variation within that span, or depending on when you entered and exited, could easily have generated a different outcome. Over the last two years, for example, the total market ETF has returned an annualized 18.9% versus about 18.5% for the S&P 500 ETF.

Investors who are skeptical of IPO hype aren't crazy. Newly listed companies in the U.S. historically have, on average, a poor market-adjusted track record in their first couple of years from where they end trading in their first session.

Looking at the most recent IPO boom year, back in 2021, the S&P 500 index outperformed several major total-market indexes, according to FactSet data.

Case closed then? Not quite. IPO vintages vary just like anything else.

In 2012, when Meta Platforms, then Facebook, went public, that year's IPOs from their first-day closing price on average outperformed the broader market over the next three years, according to data compiled by University of Florida finance professor Jay Ritter. In 2012 and 2013, the S&P 500 index's annual returns trailed several total-market benchmarkets, according to FactSet data.

The types of companies going public matters, too. IPOs of very large companies, with $1 billion or more in inflation-adjusted, past-year sales pre-IPO, on average historically from 1980 to 2024 just about matched the market's performance over three years from their first-day closing price, according to Ritter's data. And IPOs of unprofitable tech companies with $100 million or more in inflation-adjusted past-year sales? Those actually beat the market by more than 11% over three years, on average.

Of course, in any given year, across a vast market, with IPOs usually representing just a sliver of companies, it is quite difficult to attribute any broad index's performance to having or not having new listings. The point is just that it is difficult to predict any of these outcomes, especially over the shorter term.

Could SpaceX's sheer size and magnitude change the calculus? It has already traded at prices that make it one of the U.S. market's largest stocks.

However, SpaceX's limited float will curtail its index impact. Most indexes adjust a company's market value by how much of it is freely available to trade. SpaceX initially sold less than 5% of its stock in its offering.

That will rise as more shares are freed up for sale. But according to estimates by Morningstar analyst Zachary Evens, SpaceX's float is unlikely to exceed 50% after a year. The percentage that is floating can also depend on the degree of insider selling, as well as new stock issuance by the company.

The bottom line for a self-styled, passive investor who actively moves in and out of different indexes for near-term performance reasons, or to avoid (or include) a certain stock? They will find themselves in the same stock-picking and market-timing quandaries they had initially set out to avoid -- with potentially little ultimate benefit.

How much you should invest, how you should spread funds across asset classes and how much you should pay managers, are far more consequential decisions.

Write to Telis Demos at Telis.Demos@wsj.com

(END) Dow Jones Newswires

June 22, 2026 05:30 ET (09:30 GMT)

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