Understanding The Role of IPOs In Your Investment Portfolio
With the buzz around this summer’s initial public offering (IPO) of SpaceX and expected IPOs from Anthropic and OpenAI, many people are paying more attention to how these can impact their investment portfolio. While the opportunity to buy one of the first public shares in a company can seem exciting, veteran investors and insiders often look at these public market debuts with skepticism. Are IPOs worth the hype they generate?
What Is an Initial Public Offering?
Also called a stock launch or “going public”, an IPO marks when shares of a private company become available for sale to institutional and retail investors.
Brokerage firms promote the idea of ‘getting in on the ground floor’ to be one of the first to buy these new shares. But it’s important to remember that the true ground floor was when the private firm was founded years prior. Brokerage firms sell a product; their focus is not taking care of people.
The IPO can be an opportunity for a company to give the founders liquidity and a potential exit plan, and to raise capital to spend on future growth. Investment banks that act as underwriters for the IPO receive a commission that averages between 5-8%–higher than the rest of the stock market, where shares can be bought with as low as 0% commission.
What Returns Do Investors Tend to See on IPOs?
Initial public offerings draw a lot of attention and excitement, but their history tells a different story.
A University of Florida study of returns from the first close of each IPO trading day found that these new issues lost, on average, 20.2% (market adjusted) over the following three years. Recent history has been less kind. On average, IPOs that went to market in 2020, 2021, 2022 and 2023 experienced three-year, market-adjusted returns of -78.6%, -68.6%, -61.4% and -52.7%.
In his 1987 book The Wall Street Waltz, writer Ken Fisher declared that IPO stands for “It’s Probably Overpriced.” Nevertheless, some successful companies have seen shares rise far higher than their IPO in the long run.
The Largest IPO In History
This past summer marked the IPO of SpaceX, Elon Musk’s aerospace and artificial intelligence company. The record-setting valuation of $1.77 trillion dollars was questioned by many market analysts, who noted that the company reported net losses in the billions in 2025 and Q1 of 2026.
On June 12th, the day the IPO occurred, SpaceX hit a $2.1 trillion market cap. The company shot up to the sixth most valuable firm in the U.S., only behind Nvidia, Apple, Alphabet/Google, Microsoft, and Amazon. Shares peaked in price on June 16th, but by late July, they had plunged 50%, making Musk’s tenure as a trillionaire quite brief.
When Do IPOs Enter Index Funds and ETFs?
Companies are not indexed immediately after their IPO. The stock is usually highly volatile in the first few days, so index providers require some time for stabilization. Each market index has their own rule for when a company is eligible. Some are as short as 10-15 days after the IPO, while others have a strict “seasoning period” of 3-12 months.
Many indexes fast-track entry for large-cap IPOs, which allowed SpaceX to quickly join some ETFs managed by Vanguard, Invesco, and BlackRock. The S&P 500 considered shortening its one-year seasoning period for SpaceX but ultimately decided not to change their rules.
Key Takeaways
The news that circles around IPOs may generate a “fear of missing out”, but investors should be aware of their historical performance. The attention surrounding a company might be inflating the true value of their stock, so buying shares outright on the first day of trading may come with risks. Any investment decision should be driven by your long-term objectives more than the headlines. Don’t be a victim of the hype.
Best Regards,
Beth Jones, RLP®, AIF®, CeFT®
Certified Financial Transitionist®
Registered Life Planner
Financial Consultant
Third Eye Associates, Ltd. is a Registered Investment Adviser
This article is intended for general educational purposes and should not be considered investment advice or a recommendation to buy or sell any security. At Third Eye Associates, we focus on designing resilient long-term investment strategies by partnering with independent investment managers and helping clients maintain perspective through changing market conditions.
Sources:
https://site.warrington.ufl.edu/ritter/files/IPO-Statistics.pdf
https://www.advisorperspectives.com/articles/2025/12/10/spacex-ipo-puts-2-9-trillion-listings-table
https://fortune.com/2026/07/29/elon-musk-money-matters-x-money-former-trillionaire/
https://www.morningstar.com/funds/index-funds-will-buy-more-spacex-stock-just-insiders-are-selling