Cooling IPO Market Puts These ETFs in Focus - ETF News And Commentary


Last year, the U.S. IPO market surged out of the gate thanks to an improving economy, a rock-bottom interest rate environment and an even more impressive performance by the stock market. U.S. indices like the S&P 500 returned a stunning 30% last year.  Being completely rapt by this trend, investors poured their money into the market in anticipation of a sizable return.

While many believed that the stock market rage will continue in 2014, in reality all the indices stumbled to start the year. A run of weak data points in the wake of the worst winter in decades, a protracted standoff between Russia and the West on the Ukrainian issue, slowdown in China, emerging markets woes, overvaluation concerns and high beta pain stifled the markets (read: The Momentum Stock Crash Puts These ETFs in Focus ).

Both the S&P 500 and Nasdaq-100 indices managed to gain about 4% so far this year. This performance fared quite poorly when compared to that of the year-ago returns. Last year, both the indices had gained about 14% and 9.4%, respectively, through May 29. Not only these market-oriented movements, but also the economy is too far from standing on its own feet with feeble fundamentals.  The U.S. economy is said to have contracted 1% in Q1, as per the revised data.

IPO Market Softened

Thanks to these dull numbers, the IPO market seems to be losing its charm this year. Glamour stocks hailing mainly from the technology and social media space drove the IPO market last year. Ironically, this class of stocks was thrashed the most this year. Investors are seemingly hesitant to take part in the stock market which basically dampened the appeal for the IPO market.

A Financial Times study says that already seven IPOs have been dropped as of May 22, marking the highest monthly removal this year, according to Dealogic. Moreover, almost half the stocks that were listed in April and in May priced below their band. Another study revealed that the total number of IPOs was 256 in 2013 while 140 companies filed for IPOs through early May (read: Can IPO ETFs Remain Hot in 2014? ).

Is the IPO Market Tthat Gloomy?

While investors have seen some removals in the IPO market lately, there are some hopeful data points as well. As per Renaissance Capital, despite the massive momentum crash, the U.S. IPO market held up pretty well in 1Q14. During this time frame, companies raised $10.6 billion - the busiest level of activity than any other first quarter since 2000 and twice as good when compared year over year.

Not only the American companies, even several Chinese companies are eyeing the U.S. indices this year and drawing investor attention.  These include Alibaba - the Chinese e-commerce giant, - the largest online direct sales company in China and Weibo - the Chinese version of Twitter (read: Weibo IPO Plan Puts These ETFs in Focus ).

Debatably, the most anticipated IPO of 2014 is likely to be one of the largest in U.S. history, and could even surpass the success of Facebook's IPO.'s IPO has been extremely successful in this uncertain investing backdrop with 15 times oversubscription and pricing above expectations. Many have been considering's triumph as a foretaste of the impending Alibaba's IPO (read: 4 ETFs to Tap on Upcoming Alibaba IPO ).

Sum and substance of the discussion is that not all but only those companies with potential will run the show in the 2014 IPO market. Further, the economic setting is slowly improving in Q2 and fund managers are in quest of suitable investment options.

Corporate earnings, which are seeing continued cuts in forward estimates, might pick up once economic indicators start to take an upper hand.  As of now, Renaissance Capital advises a close watch on the IPOs of large PE-backed names (Biomet, La Quinta) and spinoffs (GE's Synchrony) slated for this year.

How To Play?

While a single stock pick is rather a difficult task in today's dicey environment, the ETF world offers IPO ETFs to make the most of this investing zone with reduced risk quotient.

First Trust US IPO Index Fund (FPX)

This ETF provides exposure to the booming U.S. IPO market by tracking the IPOX-100 U.S. Index. The fund has accumulated $465.9 million in AUM. It charges 60 bps in fees a year.

In total, the fund holds 100 securities in its basket with the largest allocation going to Facebook (9.44%). Abbvie (9.19%) and General Motors (5.86%) take up the next two positions. Since the ETF focuses on 100 largest and most liquid U.S. IPOs, new companies can find entry into the fund's holding after trading for a minimum of 100 days.

Consumer discretionary, information technology, energy and healthcare round out the top four sectors of the ETF. FPX gained nearly 42% in 2013 and has added 2.65% year-to-date.

Renaissance IPO ETF (IPO)

This is a new entrant in the IPO ETF space that has attracted $27.9 million in its asset base. The ETF sees low volume of nearly 20,000 shares, suggesting additional cost beyond the expense ratio of 0.60%.

Holding 62 stocks in the basket, the fund follows the Renaissance IPO Index, which holds the largest and most liquid newly listed U.S. initial public offerings. New companies seek inclusion on a 'fast entry basis' on the fifth day of trading. is also slated to enter the ETF.  Currently, the product allocates more to Zoetis at 9.44%, closely followed by Facebook (8.52%) and Workday (5.00%).

From a sector look, technology stocks make up for one-fourth share followed by financials (19%), Oil & Gas (15%), health care (13%) and consumer services (11%). The fund has lost about 1.63% year-to-date.

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RENAIS-IPO ETF (IPO): ETF Research Reports

FT-IPOX 100 (FPX): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: IPO , FPX

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