After a strong 2013, the IPO market continues to be hot this
year. High investor demand, low interest rates, rising stock
market and improving economy are the main reasons driving the IPO
boom. Investors are now much more willing to invest in these
fledgling companies, in anticipation of high rewards later.
Some of the highly anticipated IPOs continue to feed the frenzy.
The most hyped IPO event this year undoubtedly is the US stock
market debut of Chinese e-commerce giant Alibaba. The IPO is
likely to be one of the largest in history with an expected
valuation of ~$130 billion. (Read:
4 ETFs to Tap on upcoming Alibaba IPO
Strong Momentum in the IPO Market in 2014
49 deals have been priced so far in 2014, up 81.5% from the
same period last year and proceed raised ($8.0 billion) are up
24.2% from last year, according to Renaissance Capital. That is a
strong rebound from the lows seen in 2008, at the height of the
financial crisis, when just 31 companies went public.
Looking at the industry breakdown, Healthcare has seen the most
offerings (26) this year though the rise has been spread out
across various industries. This is nice change from the dot-com
bubble days when the IPO space was totally dominated by the tech
3 Top Ranked ETFs from hottest sectors
Are all IPOs successful?
Investors hoping to profit from this surge should however
remember that not all IPOs are successful. While a handful
of these fledgling companies may turn out to be excellent
investments, some may result in big losses.
If you have excellent skills in picking newly public companies,
which may later turn out to be like Google, Apple or Tesla, then
individual IPOs are the best for you.
But actually investing in smaller, rather unknown companies can
be quite risky.
of companies that launched IPOs in the last six months have lost
money, highest from March 2000, when 80% of new companies were
Further, some valuations are now touching crazy levels. Castlight
Health, which debuted last week, now has a market value of $2.7
billion, though it had revenues of
just $13 million last year
and will not report any profits in near future. At its current
price the company has a whopping P/S ratio of 181.8. (See:
2 Rising ETFs with double digit yields
On the other hand, median IPO in 2014 through February was priced
at 14.5 times revenue-which itself is the highest in 14 years.
Case for Investing in IPO ETFs
Most investors should consider IPO ETFs that provide a low-risk
and diversified exposure to IPOs, instead of betting on
With their sharp focus on the largest, most liquid and best
performing offerings, these ETFs have been handily beating the
IPO ETFs provide exposure to newly public companies before they
join other core US equity indexes. Most broad market indexes
include newly public companies only after a 'seasoning'
period-i.e. after they have been trading for some time. For
example, Google was included in the S&P 500 index about two
years after its debut.
Investors should however note that they will not be able to
capture the first day's 'pop' (or drop!) with these ETFs, since
they include the newly public stock only after it has been
trading for a few days.
Though IPO ETFs do not participate in the first day's 'pop', this
strategy reduces their volatility. Many retail investors had
suffered losses in
IPO, one of the most hyped IPOs of all times, which fell
substantially below its offer price within the first week of
trading itself, but recovered a lot later.
Many investors probably still remember the disastrous performance
of some of the 'hot' IPOs from the dot-com era. An ETF approach
can largely reduce the risks, while offering the opportunity to
participate in the gains of a diversified group of larger, more
First Trust US IPO Index (
FPX tracks the IPOX-100 U.S. Index, which is a modified
value-weighted price index measuring the performance of 100
largest, typically best performing and most liquid U.S. IPOs
Currently, the product has a nice mix of sectors, with top four
being Consumer Discretionary, IT, Energy and Healthcare. In terms
of individual holdings, Facebook (11.0%), AbbVie (8.7%) and
General Motors (6.9%) take the top three spots.
With a 10% cap on all constituents, the fund rules out too much
concentration in any single holding. The ETF, which was initiated
in 2006, has managed to attract about $570 million in assets so
far. It charges annual expenses of 60 basis points.
The product has crushed the broader market over the last five
years, returning 288% compared with 170% for SPY.
Renaissance IPO ETF (
IPO tracks the rules-based Renaissance IPO Index which is
comprised of the largest and most liquid newly-listed U.S. IPOs.
New companies are included in the index on the fifth day of
trading or during quarterly review. They are removed after two
Zoetis, Facebook and Workday are the top holdings as of now. This
ETF is more top-heavy compared with FPX, with top ten holdings
accounting for almost 60% of the asset base. The fund charges an
expense ratio of 60 basis points.
The ETF was launched recently, but has been handily beating the
broader market since inception.
The Bottom Line
The IPO market is booming this year. But investing in new,
untested companies can be risky. ETFs provide a low-risk and
convenient way to profit from the IPO boom.
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FT-IPOX 100 (FPX): ETF Research Reports
RENAIS-IPO ETF (IPO): ETF Research Reports
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