Historical IPO underperformance: the new-issues puzzle

In this episode, the Rational Reminder team unpacks the mechanics and implications of mega IPOs like SpaceX, OpenAI, and Anthropic potentially entering public indices. They explore how index funds handle IPO inclusion, why newly public stocks tend to underperform, and how structural features of indexing can lead to systematically buying high and selling low. The conversation dives into academic research on IPO returns, the role of free float in index construction, and how evolving market dynamics are forcing index providers to reconsider long-standing rules. They also examine alternative approaches from firms like Dimensional and Avantis, and whether investors are truly missing out by not accessing private markets. This episode blends market structure, empirical evidence, and investor behaviour into a nuanced look at one of the most talked-about investing topics today.

Key Points From This Episode:

(0:00:04) Introduction to the Rational Reminder Podcast and hosts.

(0:00:19) PWL Capital expands to Vancouver through partnership with Macdonald Shymko & Company.

(0:03:45) Main topic: "Mega IPOs" and concerns about index fund exposure.

(0:05:00) Why large private companies going public matters for index investors.

(0:06:55) Index funds aim to represent markets—not optimize returns.

(0:08:41) Massive scale of index funds and implications for IPO demand.

(0:10:19) Why IPOs tend to have low expected returns.

(0:12:39) How index inclusion rules differ (S&P 500 vs total market indices).

(0:15:53) Research on "fast-track" IPO inclusion and front-running effects.

(0:18:59) Why mega IPOs may amplify existing inefficiencies.

(0:20:39) Important reminder: indexing trade-offs are small and structural—not fatal.

(0:21:29) Potential solutions like pre-allocating IPO shares to index funds.

(0:23:24) The role of free float in determining index weight.

(0:25:00) NASDAQ rule changes and implications for low-float mega IPOs.

(0:27:40) Conflict of interest concerns in index rule changes.

(0:32:43) Why index providers may need to evolve with changing markets.

(0:35:27) Historical changes to index methodology (e.g., float adjustment).

(0:37:21) Why IPOs are historically poor investments ("new issues puzzle").

(0:40:28) Evidence from Dimensional on IPO underperformance.

(0:41:14) IPOs behave like "junk" stocks (small, unprofitable, high growth).

(0:43:04) Low-float IPOs and extreme underperformance data.

(0:46:00) High valuations (price-to-sales) linked to worse IPO outcomes.

(0:48:00) Index rebalancing as systematic "bad market timing."

(0:50:03) Dimensional vs Avantis approaches to IPO inclusion.

(0:52:56) Trade-offs and tracking error across different strategies.

(0:54:16) Importance of investor discipline amid changing narratives.

(0:56:00) Are investors missing out on private markets?

(0:58:00) Risks and costs of accessing private shares (SPVs, fees, fraud).

(1:00:15) Indirect exposure to private companies through public equities.

(1:02:52) Final takeaway: index investing already captures most opportunities.

(1:03:25) Wrap-up: IPOs are a known cost—not a reason to abandon indexing.

Links:

Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on YouTube — https://www.youtube.com/channel/ Benjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://pwlcapital.com/our-team/

Cameron on X — https://x.com/CameronPassmore

Ben Wilson on LinkedIn — https://ca.linkedin.com/in/ben-wilson

Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)