Mega-IPOs: New Challenges for Indices

• Dina Ting
  Head of Global Index Portfolio Management
  Franklin Templeton ETF

Investors could watch as young firms moved from the small-cap to the mid-cap segment and – in rare cases – eventually became among the world’s largest companies. Today, this development is increasingly taking place in private markets. We now see that some companies already appear fully established by the time they go public.

This shift is putting index construction to the test. With SpaceX’s IPO and potential future IPOs by OpenAI and Anthropic, the question of how quickly very large companies should be included in key benchmarks is once again coming into focus. Some index providers—including FTSE Russell and Nasdaq—are striving to ensure that their benchmarks can capture the next generation of large, publicly traded companies. Others, including S&P Dow Jones Indices, prefer to stick to proven safeguards and maintain a more deliberate approach to eligibility and inclusion.

In our view, this diversity of approaches is healthy. Index providers are trying to balance two key objectives: representing the investable market as it evolves, while simultaneously maintaining liquidity, stability, and transparent rules. There is no single right answer. A benchmark that moves too slowly may miss important changes in the economy. A benchmark that moves too quickly may expose investors to companies before trading history, free float, and fundamentals are sufficiently established.

An often-overlooked aspect of benchmark construction is that headline valuations and index weights are not the same. Most major stock indices are based on free-float-adjusted market capitalization, meaning they account for the shares that are actually available for public trading. Prior to SpaceX’s IPO, FTSE Russell estimated a total market capitalization of $1.5 trillion, but an available market capitalization of only about $70 billion. This resulted in estimated weights of just 0.11% in the Russell 1000 Index and 0.08% in the FTSE GEIS All-World Developed Index. ¹

A company can dominate the headlines and still be included in a broad index with a comparatively modest initial weighting. Over time, lock-up restrictions expire—that is, holding periods that typically prevent founders, employees, and early investors from selling their shares immediately after an IPO. This allows more shares to enter the public market and potentially increases the company’s index weighting.

Another question investors may not have considered is whether such listings automatically make indices more growth-oriented. At first glance, the answer seems obvious. Many of these companies operate in sectors such as artificial intelligence (AI), aerospace, and cloud infrastructure. However, index construction is often more nuanced than headlines suggest. FTSE Russell’s approach illustrates this. Fast-entry IPOs have generally adopted the style characteristics of their assigned subsector until company fundamentals become available. However, the index provider has also acknowledged that relying exclusively on industry averages could lead to so-called “market misrepresentation,” leaving room in certain cases for alternative treatment. For SpaceX, FTSE’s preliminary classification pointed to telecommunications, where the subsector average was 18% growth and 82% value.²

This may surprise investors who intuitively classify anything related to rockets as growth. But it serves as a useful reminder: index investing is rule-based, not headline-based. Style indices don’t simply ask whether a company feels innovative. They evaluate characteristics such as valuation, earnings, growth metrics, and industry classification. As more mature companies move from private markets to public markets in the future, some of them could challenge traditional style frameworks.

This is where the broader implications for portfolios become apparent. Broad-market equity index ETFs remain efficient, tactical tools for building diversified equity exposure, and country- or style-specific ETFs can help investors implement more targeted strategies. Yet indices are not static. New companies are added, sector weights shift, free float changes, classifications evolve, and concentrations emerge. Index exposure is therefore not necessarily something investors should set and forget.

We believe that the next wave of major IPOs will make the motto “Know what you own” even more important, not less. While the IPO may make headlines, the real story could be how these companies reshape their presence in benchmark indices over time.

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Sources

¹ FTSE Russell. Estimated weights as of June 2026. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. The FTSE GEIS All-World Developed Index is a market-capitalization-weighted benchmark that tracks the performance of large- and mid-cap companies in developed markets.

² FTSE Russell. As of June 2026.