To be sure, returns over a 3 1/2-month period don’t tell the whole story. It’s more informative to look at returns for these funds over longer time horizons.
For instance, since its inception in October 2013, IPO is up 57.7%, less than the S&P 500’s 89.9% gain, and less than rival FPX’s gain of 86.9% in the same period.
So, while IPO may be outperforming this year, FPX is leading the charge since Q4 2013, and both are underperforming the S&P 500 since then.
That said, it’s a completely different picture when you go back all the way to April 2006. That’s when FPX made its debut. Since then, it’s up a whopping 312.8%, easily trouncing the S&P 500’s 196.1% return in the same period.
It goes without saying, the time period you measure impacts the returns you will see. But it certainly seems FPX has a superior track record compared with that of IPO, one that handily outpaces even the broader market.
But as the old adage says, past performance is no guarantee of future results. This year’s outperformance in IPO speaks to that.
Focus On Largest IPOs
The wildly different portfolios of the two ETFs explain the differences in returns. FPX holds positions in the 100 largest recent IPOs, purchased after the close of the sixth trading day and held for approximately four years.
The ETF captures “around 85% of total market capitalization created through U.S. IPO activity during the past four years,” according to issuer First Trust.
The competing ETF, IPO, isn’t much different, in that it captures the top 80% of the market cap of new IPOs. It adds “sizable” IPOs on a fast track basis—Lyft was added to the fund a week after it came to market—while other IPOs are added during scheduled quarterly reviews.
Both ETFs’ focus on larger IPOs may be beneficial for their returns, as studies suggest companies with revenues exceeding $1 billion when they debut perform better over the long term.
Where IPO and FPX significantly diverge is their holding periods. FPX aims to own its stocks for around four years; IPO kicks them out after two years.
Another difference is that if a stock is acquired or merges with another, FPX will hold the stock of the acquirer or merged entity, something rival IPO won’t do. That’s resulted in some unusual names ending up in FPX’s portfolio, such as Verizon, Stryker, Dow, Tyson Foods, General Mills and Hershey, among others—stocks of mature companies that have been around for ages and could hardly be considered fresh IPOs.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Because of its more targeted exposure and shorter stock holding period, IPO gets the nod as the purer play on IPOs, even though its historical performance and liquidity pale in comparison with FPX.