[Dig1t]

They only go into the index if they are actually worth enough to go into the index. If they drop below a certain value they will naturally be kicked out of the index just like any other company. I.e. if they are not actually in the top 500 US companies then they will not be in the 500 index. The risk of any one company is balanced by all the other companies in the index also.

If they really are a scam, their value will drop and they will be kicked out of the index. I still don’t understand how this means people will be “holding the bag”.

Additionally if you really believe that they are a scam and their price will fall you can just short the stock to completely neutralize their effect on your 401k.

[randbyte]

By the time they drop and being kicked out (if they do) the insiders already dumped their shares. Not to mention now all the index fund holders will rush to sell creating even more price pressure.

Shorting (itself being a bad idea for regular investors) also breaks the mantra of passive investing, 401k or otherwise. It’s almost impossible to short right after IPO because of low float and high margin risk.

These mega IPOs are just using passive investors as backstop.