Imagine this: You are a schoolteacher in Ohio. Or an engineer in Bangalore. Or a nurse in London.

Every month, a portion of your paycheck quietly flows into a retirement account invested in a broad market index fund: the S&P 500, the Nasdaq-100, the Nifty 50, or something similar. You are not trying to pick the next great AI company. You are not studying IPO prospectuses. You are not debating valuation models on social media. You are simply doing what decades of financial advice have told you to do: buy the market, stay diversified, and let compounding work.

Then one morning, without making a single investment decision, you wake up owning a piece of a newly public trillion-dollar company that has traded in the public markets for only a few weeks. Not because you chose to buy it but because the index chose for you. That is the issue we are about to confront in public markets.

A fair question to ask is: “Vinay, what exactly is the problem here? People choose to invest in an index fund. The index provider decides which companies belong in that index. That is how passive investing works. So why make a fuss about it?”

The problem is not that indices change. They should change. The problem is not that great new companies eventually enter major indices. They should.

The problem is when index rules are changed or relaxed in a way that allows newly public, trillion-dollar companies to enter too quickly: before the public market has had enough time to understand their economics, governance, durability, liquidity, and valuation.

Index inclusion is not a neutral event. It creates automatic demand. It turns millions of passive investors into buyers, not because they studied the company and made an active decision, but because the index methodology made that decision for them.

But what are these rules? And why do they matter so much?

Historically, index providers had rules around seasoning, profitability, liquidity, and public float for a reason. They gave the market time to discover price. They gave the company time to report as a public company. They gave investors time to understand governance, economics, margins, dilution, insider selling, and the durability of the business model.

With the new Nasdaq-100 fast-entry framework, very large IPOs can potentially enter the index much faster if they rank among the largest companies by market capitalization. That means a company can go from private-market pricing to public-market index inclusion in a very short window.

The S&P 500, to its credit, has not made the same change for its core index. It has decided to preserve its existing requirements around financial viability, seasoning, and float.

The bigger concern is with the Nasdaq-100.

Now you may ask: “Vinay, this is good academic knowledge, but why does it matter right now?”

It matters because three of the most important companies of our lifetime are either going public or being discussed as future trillion-dollar IPO candidates: SpaceX, OpenAI, and Anthropic.

These may be exceptional companies. Their technology may be extraordinary. They may define the next decade of computing, AI, space, and infrastructure. But adding companies like these into major indices too quickly is still a concern.

The valuation jump is the core issue. SpaceX is reportedly coming public around a $1.75 trillion valuation. Earlier investors who bought in when the company was valued in the low tens of billions are sitting on extraordinary gains. OpenAI was reportedly valued at around $29 billion in early 2023 during Microsoft’s investment discussions and is now being discussed as a potential $1 trillion IPO candidate. Anthropic is even more extreme. It was valued at just over $4 billion in 2023 and has recently been discussed at close to a $1 trillion valuation.

Again, these may all be great companies. They may eventually justify every dollar of these valuations. But that is not the same as saying they should be pushed into major indices immediately.

The early investors took risk and are now sitting on extraordinary paper gains. Good for them. That is how venture capital is supposed to work.

But why should ordinary public-market investors, pension funds, retirement accounts, and passive index holders become the automatic exit liquidity at trillion-dollar valuations before these companies have proven themselves through multiple quarters (ideally years) of public-market reporting, governance, earnings quality, liquidity, and valuation discipline?

A company can choose when it wants to IPO. It can choose the valuation at which it wants to test the market. Institutional investors can choose whether they want to buy. Retail investors can choose whether they want to participate. That is the market doing what the market does.

But index inclusion is different and changing these time tested rules at this time seems opportunistic and risky.

When a company enters the Nasdaq-100 or the S&P 500, it is no longer just a discretionary investment. It becomes part of the default portfolio for millions of people. Retirement accounts, passive ETFs, pension funds, target-date funds, and index investors are suddenly exposed to it because the “updated/revised index methodology” tells them to be exposed to it.

Even if these companies eventually justify every dollar of their valuation, the question is: who is taking the risk at each stage? Private investors got access when the companies were private. They took risk early and should be rewarded for that, but if these companies are added into major indices too quickly, the public market becomes the automatic buyer at the end of the chain.

The passive investor may not be making an active decision to buy SpaceX, OpenAI, or Anthropic at these valuations. They may simply be buying the Nasdaq-100.

This mechanism becomes very convenient for private-market investors. A company builds value privately. The valuation keeps stepping up. Then it goes public at a massive valuation. Then index funds and passive vehicles are required to buy. Over time, early investors and employees get liquidity.

Again, this does not mean the companies are bad. It does not mean the IPOs are bad. It does not mean the investors are doing anything illegal or wrong. But the accelerated index inclusion creates a transfer of risk without time-tested checks.

This is especially important because these companies are not normal mature public companies yet. Public investors have not seen multiple quarters of audited public-company reporting. They have not seen how these businesses behave through public-market scrutiny. They have not seen how management handles guidance, margins, capex pressure, governance, dilution, and competition as public companies.

For AI companies, this matters even more.

The market is still trying to understand the economics of frontier AI. We do not yet know the steady-state margin structure. We do not know how much pricing power will survive competition. We do not know whether model performance becomes commoditized. We do not know how much capex will be required to stay competitive. We do not know if the current revenue growth justifies the infrastructure spend.

These companies may answer all of those questions brilliantly. But they have not answered them as public companies yet. That is why “being important” should not be the same as “being index-ready.”

There is a difference between a company being systemically important to technology and a company being ready for mandatory passive ownership.

My view is simple:

• Let these companies IPO.
• Let investors buy them.
• Let the market debate them.
• Let the bulls be bulls and the skeptics be skeptics.
• But do not force index investors into them too quickly.

The S&P 500 should preserve its discipline. The Nasdaq-100 should either keep a stricter seasoning requirement or create a clear alternative version of the index that excludes newly public mega-cap companies until they have traded publicly for a reasonable period and reported enough public financial history.

• There should be a Nasdaq-100 ex-new-mega-IPOs version.
• There should be an S&P 500 equivalent if the S&P ever changes its rules in the future.
• Investors should have the choice to buy the innovation index or the seasoned index.

Because passive investing works only when index construction is disciplined. If index rules become too flexible around the most hyped companies, passive investors may not be getting broad market exposure anymore. They may be getting forced exposure to private-market exit valuations.

Disclaimer: https://vinaysachdeva.com/disclaimer/. The opinions expressed in the blog post are my own and do not reflect the view(s) of my employer. This content is for informational purposes only and should not be construed as financial advice. The author might have ownership in the companies/indices described in this blog post.