Every so often, an initial public stock offering (IPO) captures investors’ attention and creates a sense that something big is happening. The rumored offering from SpaceX is shaping up to be one of those moments.
For those who fear missing out, an IPO can feel like a once-in-a-lifetime opportunity. The many unknowns—including timing, structure, and access—only add to an IPO’s mystique.
But what does the evidence tell us about the importance of IPOs to our portfolios?
According to University of Florida Professor Jay Ritter, who has studied IPO performance for decades, the long-term record on IPOs is underwhelming. Ritter analyzed over 9,000 offerings across a variety of market cycles. His research concludes that IPOs, as a group, underperform broad market benchmarks.
Researchers at Dimensional Fund Advisors have reached a similar conclusion. Looking at U.S. IPOs from 1992 to 2024, they found IPOs underperformed the U.S. stock market by more than 5% annually (chart below). Importantly, this pattern held across different sub-periods, including the late 1990s when IPO activity surged with the dot-com boom.
Why the long-term underperformance?
Part of the explanation may lie in the characteristics of these companies. IPOs tend to have high valuations and lower levels of profitability—traits historically associated with lower expected returns. Professor Ritter also notes that IPO activity tends to increase after periods of strong market returns. High prices tend to imply lower future returns.
Rather than chasing IPOs at the height of attention, Vista’s strategy incorporates them over time as part of a diversified portfolio. There’s no need to chase the latest offering, even when it seems headed for the moon.
U.S. IPOs vs Russell 3000 Index, annualized returns (1992 to 2024)
Source: Dimensional Fund Advisors using Bloomberg data. The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies and is designed to represent the investable U.S. stock market. The hypothetical IPO portfolio includes US market IPOs with an offering date between January 1, 1991, to December 31, 2024 and is rebalanced monthly to include all firms with an IPO during the prior 12-month period. Weights are based on prior month-end market capitalization. This is a hypothetical portfolio thus performance does not reflect the expenses associated with the management of an actual portfolio.
