With prominent AI-focused companies expected to be listed at potentially record-breaking valuations, 2026 is shaping up to be a historic year for initial public offerings. When these companies will enter major market indexes—and therefore equity index-tracking portfolios—has drawn significant attention.
For investors in actively managed strategies, manager due diligence is understood to be second nature. But for index-based investors, an equally important question may go unasked: What are the rules of the index powering my portfolio?
We think it’s important to remember that indexes aren’t interchangeable. Each provider maintains its own methodology for determining which stocks are included, when they are added and how they are weighted. These differences can have meaningful performance implications. For most index-based investors, the experience is straightforward: If the company enters the index, you own it. Direct indexing investors have some additional flexibility and control.
Reviewing index inclusion rules by provider
Nasdaq-100 Index®. On May 1, 2026, Nasdaq introduced a Fast Entry rule. Under the updated framework, newly listed companies whose market capitalizations rank within the top 40 Nasdaq-100 constituents are evaluated for inclusion on their seventh trading day; if eligible, they can be added after approximately 15 trading days—down from the previous seasoning requirement of three months. Nasdaq also eliminated the prior 10% minimum float requirement for companies eligible for fast entry.1
Russell US Indexes. On May 27, 2026, FTSE Russell announced that IPOs exceeding the Russell Top 500 market-cap breakpoint are eligible for fast entry after their fifth trading day. Companies with less than 5% free float or voting rights at listing may still qualify, provided lock-up arrangements bring them above minimum thresholds within 12 months. Previously, IPOs were reviewed only at quarterly reconstitutions.2
S&P 500® Index. On June 4, 2026, S&P Dow Jones Indices announced that it wouldn’t change its eligibility rules for the S&P 500 or S&P Composite 1500, confirming that it will maintain its 12-month seasoning period, minimum investable weight factor (IWF) requirement and financial viability screen, which requires positive GAAP earnings in the most recent quarter and cumulatively over the prior four quarters.
It’s worth noting, however, that S&P did update the IWF eligibility rules for the S&P Total Market Index and Dow Jones U.S. Total Stock Market Index, which could allow fast-track entry into those broader benchmarks.3
MSCI World and ACWI. MSCI has maintained its long-standing methodology without modification. The Global Investable Market Indexes (GIMI) framework has included explicit rules for the fast-track inclusion of large IPOs since 2007 and applies a standard three-month seasoning period. However, “large IPOs” meeting certain size and investability thresholds can be included in as few as 10 trading days after listing through MSCI's existing event-driven process. MSCI has emphasized that its rules are “applied consistently and are not tailored to, or modified in anticipation of, any specific IPO.”4
Recognizing free-float market capitalization as a driving force of index weights
The estimated valuations of these recent and upcoming IPOs may grab the headlines, but index weight is generally based on free-float market capitalization, which is the share of stock available for public trading—not total enterprise value. Given the substantial private ownership stakes typical of newly public companies, actual index weights can be a fraction of what the total valuation might imply.
Changing index rules over time
As this episode illustrates, index methodologies aren’t static. Providers periodically update their rules in response to evolving market structures, typically following a structured process: The provider identifies a structural trend, publishes a formal market consultation, reviews feedback from stakeholders and announces whether changes will be adopted.
In 2026 alone, three out of four major providers engaged in this process: Nasdaq and FTSE Russell adopted accelerated inclusion rules, and S&P Global held a consultation but declined to change its core criteria. MSCI already had a framework for including large IPOs since 2007. The takeaway? The index we track today may not operate under the same rules tomorrow.
Looking for a different approach?
For investors in traditional pooled vehicles like ETFs and mutual funds that are passively managed, index construction decisions are final. If a company enters the index, the fund must buy it automatically—often at or near peak demand, during periods of limited float and elevated price volatility.
In a direct indexing framework, by contrast, that constraint doesn’t apply. Direct indexing gives investors control at the individual security level. Instead of owning a fund, investors own the underlying stocks that compose the index. That opens the door to customization, including the ability to avoid owning specific securities.
This distinction is especially relevant for high-profile IPOs. A direct indexing investor can exclude newly added names initially, allowing time for price discovery to play out. The goal may not be to avoid these companies altogether, but simply to delay entry until initial volatility settles, liquidity improves and valuations are better tested in the public market.
Customization can come with trade-offs, however. Choosing not to hold a newly added index constituent introduces potential tracking error relative to the benchmark. Performance may diverge, positively or negatively, depending on the market return of those stocks.
But isn’t this precisely the point? Direct indexing turns an implicit exposure into an explicit decision. Rather than receiving allocations at a moment of peak uncertainty, investors can decide whether, when and how to invest.
Help clients get the precise exposure they seek
Gaining flexibility from separately managed accounts
One underappreciated feature of direct indexing is that customization doesn’t have to be permanent. A restriction avoiding certain securities today can be lifted tomorrow. That creates a flexible implementation path: Exclude IPO names during early volatility, monitor performance and benchmark impact, then introduce exposure once conditions stabilize. This kind of phased approach isn’t possible with pooled vehicles.
Conversely, investors who want or already have exposure to a newly public company—for example, as an employee, from private equity distribution or by purchasing in the open market—before it enters their benchmark index have the flexibility to restrict ownership in a separately managed account. That allows them to help mitigate the risk of having too much exposure when the stock is added to the benchmark. Once the stock becomes part of the index, they have the flexibility to transfer their shares in-kind.
The bottom line
The broader takeaway isn’t whether investors are for or against any specific company or sector. It’s about recognizing that index construction choices are evolving and, in some cases, accelerating to accommodate the scale of modern IPOs. These decisions directly affect what ends up in your portfolio and when.
For investors who are comfortable owning everything their benchmark holds, nothing changes. For those who want a more deliberate approach—driven by concerns about valuation, concentration or simply timing—direct indexing provides a practical framework for making those choices explicit.
In a market where index funds can't say no, customization offers a straightforward advantage: You can.
1 Nasdaq Newsroom, “Nasdaq‑100 Index® Methodology Update: Why Now, and What It Means,” May 8, 2026.
2 FTSE Russell, “Market Consultation: Russell US Equity Indexes, IPO Fast Entry and Minimum Eligibility Requirements,” May 26, 2026.
3 S&P Global Press, S&P Dow Jones Indices Consultation on Treatment of MegaCap Companies – Results, June 4, 2026.
4 MSCI Indexes, “When Giants Go Public: MSCI's Approach to Large IPOs,” May 2026.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.
06.29.2027 | RO 5583612
