Fast-track IPO index inclusion creates shadow tax
The thesis argues that fast-track index inclusion rules allow intermediaries to front-run index funds, creating a 'shadow tax' and dragging down returns for index investors.
The argument
The discussion references a 2025 paper by Marco Sammon showing that fast-track IPOs outperform non-fast-track counterparts by over five percentage points up to their inclusion date, after which the price reverts. This dynamic allows hedge funds and other intermediaries to capture the price pop, leaving index funds to buy at the peak and hold the subsequent downside.
The thesis, stress-tested
✓ What validates it
- ✓Academic or industry tracking of index drag showing an increase beyond the historical 50-70 basis points
- ✓A major index provider changing its fast-track rules in response to a mega-IPO
▸ Risks discussed
- ▸Index providers may adjust rules to delay inclusion
- ▸Companies could allocate IPO shares directly to index funds to bypass intermediaries
- ▸Strict free-float requirements (e.g., CRSP's 10% cutoff) may exclude some mega-IPOs entirely
Hear it yourself
"So Marco Sammon and his coauthor in this paper show that the expected index investor demand for IPO shares causes fast track IPOs to outperform their non fast track counterparts by over five percentage points following their listing."
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