By James Mackintosh
If what you want from your index fund is access to the latest hot stocks, you're in luck. The passive funds holding trillions of dollars of 401(k)s and other investments are rushing to change their rules as the IPOs of SpaceX, OpenAI and Anthropic draw closer.
The latest, on Thursday, was a proposal from S&P to drop the requirement to make a profit and wait a year for IPOs to get into the flagship S&P 500.
Index providers argue that the IPOs are so big that previous precautionary rules have too distorting an effect on their ability to track the market. But really this is about giving users what they seem to want: more hot stocks.
S&P's suggestion, out for consultation with index users, is particularly egregious. It wants to ditch its profit requirement for IPOs big enough to make the top 100 by value, while retaining it for other companies.
In essence: Size shouldn't buy special treatment, but it does. IPO a midsize stock, and you are stuck in S&P limbo until you make a profit, or become big enough.
IPO a giant, and S&P no longer cares about profit -- making you eligible for a share of the billions that flow into the stock if it gets into the index, and helping keep you big. Other indexes are considering or have brought in special fast-track entry rules for giant IPOs that don't apply to smaller ones.
The S&P 500, despite what people believe, is actually a hybrid between an active and passive index. Stocks get in only if they are selected by an index committee. The S&P 500 isn't the 500 largest companies -- more than 50 smaller ones make it in instead.
The other major U.S. indexes -- from Russell, MSCI, and Nasdaq -- are all driven entirely by rules, while the S&P sets a bunch of rules then has people choose from those that qualify.
The widely-tracked Russell 1000 is the closest to a pure measure of the top companies. But like most big indexes, it weights stocks using the free float, or the percentage of the shares that actually trade, excluding stock locked up by insiders. That leads to some odd outcomes: Wireless networking stock Ubiquiti, for example, would be ranked as 202(nd) -largest with its $62 billion market value, but its low free float means it actually comes in 861(st) .
Other efforts to make indexes better for investors also make them diverge from being a true measure of the market. The MSCI U.S.A. index includes just over 500 stocks, but excludes those with "extreme price increases."
That leaves out Sandisk, the memory-chip stock spun off from Western Digital last year. After a near-30-fold explosion in size, it is now the country's 62(nd) -largest by value, worth $175 billion. Because of the extreme price rule, Sandisk is stuck in MSCI's small-company index instead, even though it is big enough for the S&P 500, Russell and Nasdaq-100.
Tesla shows how important the choice of index can be: In 2020, the S&P lagged behind MSCI U.S.A. by 3 percentage points, the most in a calendar year ever, mainly because S&P didn't admit Tesla until that December. That meant owners of S&P tracker funds missed out on Tesla's near-eightfold rise, in which it added half a trillion dollars to its market value.
Something similar could happen with SpaceX, another Elon Musk venture. If it gets the $1.75 trillion valuation being discussed, SpaceX would be the eighth-largest U.S. stock, above Meta.
Its small free float will limit its importance, but if it moves a lot that could again make the choice of index important. Add in OpenAI and Anthropic, and usually irrelevant details such as how long an index takes to admit a big new stock (S&P wants to cut from 12 months to six) will really matter to investors.
That's triply so in the Invesco QQQ ETF, which tracks the Nasdaq-100. New rules that went into force on Friday provide for accelerated entry after 15 days for IPOs of stocks big enough to make the top 40 listed on Nasdaq. It has also reversed its recent introduction of a 10% minimum free float to qualify.
Because the index eschews the modern index practice of free-float weighting in favor of the full market-value weight, that created a problem. QQQ is huge -- with more than $400 billion in assets -- and it might end up buying half of the outstanding stock if it had to try to apply full-market weighting to a company with only a 2% free float, as FTSE Russell assumed for SpaceX in its rule consultation. To prevent this issue, Nasdaq will weight stocks at the lower of three times their free float or full market value.
The first winner is likely to be British chip designer Arm Holdings, which has only a fraction of its stock public, but had its weight limited by arcane rules about its ADRs. Under the new rules, QQQ and other followers of the Nasdaq-100 will probably need to buy more after next month's rebalance as its weight triples.
Exaggerating the importance of low-float stocks in an index used purely for investment purposes looks awful to many, including my colleague Jason Zweig. And it is. But it is way better than the previous design, which could have led to a company with only 10% of its stock available being weighted at 10 times that.
Investors who really want to take part in the big IPOs are already trying to find ways in through specialist vehicles, some of which leave a lot to be desired. If the index provider rule changes go through as planned, those hot stocks are coming to an ETF near you, like it or not.
Write to James Mackintosh at james.mackintosh@wsj.com
(END) Dow Jones Newswires
May 03, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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