With the markets seemingly slumping as we head into the fourth
quarter, some reevaluation of portfolio allocations is probably a
good idea. This is especially true this time around, as the U.S. no
longer seems to be such a safe haven compared to the rest of the
world.
Still, the American market is arguably the best of the worst
among the large nations, as Europe appears to be plunging back into
crisis mode, Chinese concerns are back at the forefront, while
Japan and other Asia-Pacific economies seem mired in low growth
environments, at least for the time being.
Due to this, a focus on the U.S. probably isn't a bad idea at
this time, especially as the presidential election removes some
uncertainty and the fiscal cliff hopefully gets resolved. However,
a general broad market approach may not be the best way to attack
the problem, suggesting that many investors could be better served
by targeting a specific corner of the investing world (read
Three Outperforming Active ETFs
).
IPOs?
Although
Facebook (
FB
)
hasn't exactly performed well in light of its recent Initial Public
Offering, the trend still suggests that many IPOs perform quite
well immediately following their debut on the stock market. That is
because IPOs generally seen a nice bump on their debut offering
while more 'mom and pop' investors are now able to pile into a
stock and push demand and thus prices higher in a particular
security.
Furthermore, many IPOs are priced rather low so that investment
banks can easily sell shares of the underlying firm while also
avoiding a 'busted' IPO in which the stock fails to trade in the
positives for the day. This practice can thus usually help create
stronger performances in the medium term as well, especially in
stocks that have shown solid levels of momentum or in firms that
are continue to generate impressive amounts of investor
interest.
With this backdrop, investing in IPOs could be a good idea
despite some of the recent troubles the space has seen. After all,
Google (
GOOG
)
has added close to 600% since its initial offering, while Visa has
added close to 50% since its debut in early 2008, while
Michael Kors Holdings (
KORS
)
has added over 110% since its first appearance less than a year ago
(see
Five Top Performing Single country ETFs of 2012
).
Yet, as we have seen as of late, for every GOOG there is usually
an FB as well, suggesting that investing in just one or two IPOs
could produce subpar returns. Due to this, an ETF approach
targeting the IPO market could be the way to go, as it spreads out
assets across a variety of firms, hoping to take advantage of a
broad positive trend in the IPO space, instead of worrying about
company specific problems.
For these investors, a closer look at the
First Trust IPOX-100 Index Fund (
FPX
)
could be warranted. That is because this fund selects, using a
modified value-weighted price system, a basket of 100 stocks that
have had their initial offering with the past 1,000 trading
days.
The ETF utilizes a quantitative approach in order to select the
securities for the basket, while also putting on a 10% cap on all
constituents. The fund is rebalanced on a quarterly basis and will
generally consist of the 100 largest, typically best performing,
and most liquid IPOs that are in the IPOX Global Composite Index
(also read
Three Biggest Mistakes of ETF Investing
).
This approach looks to give investors broad exposure to a wide
variety of firms that have recently had their initial offerings,
potentially acting as a lower risk way to play the often uncertain
IPO market. In fact, according to First Trust's website, the PE for
the basket comes in at 16, the P/B is under 2.5, while the
price/sales ratio is below 1.0, suggesting decent value in the
holdings despite the growth metrics that are usually prevalent in
the IPO space.
Currently, the product also has a nice mix of sectors, with
three comprising at least 20% including energy, technology, and
consumer cyclical. Furthermore, although large caps make up just
over half of assets, mid caps (25%) and small caps (20%) also
receive big chunks as well (see
Three Impressive Small Cap Dividend ETFs
).
In terms of individual holdings,
Visa (
V
)
takes the top spot right at the 10% limit while
FB
and
GM
round out the top three. Beyond those securities, a group of energy
names rounds out the next few securities, although assets seem to
be well spread throughout the 100 names in the product.
While the fund is somewhat expensive considering its focus, fees
are 0.6% a year, volume is also quite poor, suggesting wide bid ask
spreads. Furthermore, many of these fresh IPOs do not pay much in
dividends, so the paltry 30 Day SEC yield of under 0.5% could be a
disappointment to some.
Still, despite these drawbacks, the fund really shines when
compared to the broad competition, the S&P 500 index.
Over the past five years, FPX has gained about 17.5% compared to a
-4.7% loss for SPY (also read
Five Best ETFs over the Past Five Years
).
Shorter time frames are more favorable to the S&P 500, but
the IPO-based fund still wins in performance when looking at a one
year (FPX outgains by 350 basis points) and a year-to-date look as
well (nearly 450 basis points).
So while FB may be dragging down the perception of the broad IPO
market, the segment is still going strong when you take the whole
sector into focus. For this reason, investors shouldn't get too
bogged down with one or two weak performers in the IPO market, and
should instead look to FPX as a solid outperforming fund that can
not only provide exposure to initial public offerings, but can beat
out traditional benchmarks by a pretty wide margin as well.
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@Eric
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FACEBOOK INC-A (FB): Free Stock Analysis Report
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VISA INC-A (V): Free Stock Analysis Report
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