The Takeaway
Despite the recent focus on the initial inclusion of the mega IPOs, for indexes that use float-adjusted capitalization weighting approach, the impact will be muted, with SpaceX’s offer size of $75 billion placing it outside of top 100 companies in the CRSP US Total Market Index.
The expiration of the lockup period will have a greater impact on the indexes and index funds than the initial inclusion. Assuming a 50% float, the potential turnover impact could imply a trade that represents approximately 20% of the average daily volume of the largest index constituents.
CRSP Market Indexes transitional reconstitution will be key in managing the impact of mega IPOs as their float increases. By breaking up the holdings change over five-day period, CRSP Market Indexes reduce the potential trading impact of the changes, while ensuring that the holdings accurately represent US market.
Investors trying to understand the impact of Mega IPOs on indexes and related index funds must focus on three key events:
- Initial inclusion of security in the index following IPO.
- Index Reconstitution.
- Expiration of the IPO lockup period and subsequent index reconstitution.
Out of the three events, expiration of the IPO lockup period is associated with the biggest impact on the index. With some of the unicorns’ valuations approaching $1 trillion, the float increasing to 50% causes significant turnover in the index and potentially large trades for the fund based on the index.
Given the concentration, the turnover would impact the top holdings the most. The reduction in the weights of the top 5 companies, as shown in Exhibit 6, will account for approximately 25% of the overall change caused by the mega IPOs. Assuming a hypothetical scenario where a $2 trillion fund must sell some of its holdings to acquire additional holdings in mega IPO due to increased float, the potential trade in each of the top five companies will be around $1.2 billion, or around 20% of the average daily volume.
CRSP Market Indexes transitional reconstitution manages this change by spreading the trade over five days and thus reducing the daily activity to be approximately 4% to 5% of the average daily volume.
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