The Takeaway
The trend of companies remaining private longer has led to larger, more mature firms at IPO, requiring changes to the float rule to enable accurate reflection of the investable opportunity set for a passive investor.
The expiration of a lockup period after IPO will have a greater impact on the indexes and index funds than mega-IPOs' initial inclusion in the index.
CRSP's leading index methodology accurately and cost-effectively reflects the investable universe. The innovative rules, like transitional reconstitution, are important for managing the impact of mega-IPOs.
Investors Should Consider Mega-Cap IPOs Over a Long Horizon
CRSP Market Indexes have been designed to accurately and efficiently reflect the US market investable universe by balancing representation with trading costs. Since 2017, CRSP Market Indexes have been including eligible IPOs on the fifth trading day after listing. However, historically, IPOs with limited free float were excluded by our methodology.
While low float can signal liquidity constraints for typical IPOs, it is less informative for very large companies that remain highly liquid despite lower float percentages. To reflect the new reality where companies stay private longer, leading to larger IPOs, CRSP Market Indexes adjusted its rules to allow IPO eligibility based on absolute free-float value. Under the updated methodology, large companies could be included in the index even when float percentage falls below the traditional threshold, thus enabling CRSP Market Indexes to continue to reflect the investor opportunity set accurately.
With mega-IPOs expected in the near-term, like SpaceX, OpenAI, Anthropic, and others, it is important for investors to consider the potential impact of including these mega-IPOs in the index. Since CRSP Market Indexes use float-adjusted market capitalization for weighting securities, investors should focus on the impact not just at the time of listing, but over the intermediate term, as the companies' float, and therefore the size, increases.
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