ETF Of The Week: Purest Play On IPOs

May 03, 2019

It's a good time to go public. On the heels of big-name initial public offerings (IPOs) from Levi Strauss, Lyft, Beyond Meat and more, an additional nine companies are set to go public over the next week alone.

Undoubtably, the highest-profile among these is the ride-hailing transportation company Uber, whose IPO is expected to raise $8.5 billion, in what could be one of the largest IPOs ever.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Furthermore, tech company Slack Technologies filed to go public sometime in the next month, while other tech "unicorns" like Palantir and Airbnb have announced plans to IPO later this year.

2 ETFs Offer Access To IPOs

IPOs notoriously spike on their first day of trading; as my colleague Sumit Roy recently reported, since 1980, the average first-day gain for IPOs has been 18% (read: "2 ETFs Riding Record Year For IPOs").

After that first day, however, returns tend to fall off for most newly public companies—though the ones that do succeed can provide returns of hundreds, even thousands, of percent.

For those looking to capitalize on that attractive possibility, there exist a handful of IPO-oriented ETFs, including the $1.1 billion First Trust U.S. Equity Opportunities ETF (FPX) and the $41 million Renaissance IPO ETF (IPO).

Both have seen phenomenal year-to-date returns, but IPO has outpaced FPX, with returns of 35% compared with FPX's 24%. That's almost double the 18% year-to-date return of the SPDR S&P 500 ETF Trust (SPY):

 

Source: StockCharts.com; data as of 5/2/2019

 

Big Differences Under The Hood

Over the longer haul, however, FPX has posted much better returns: Since Oct. 14, 2013, IPO's inception date, FPX is up 87% compared with IPO's 58%.

The reason for that comes back to differences regarding which stocks each ETF holds, and for how long.

FPX holds the 100 largest recent IPOs, buying shares after the close of the sixth trading day and holding stocks for roughly four years. Doing so gives it exposure to about 85% of the total market capitalization of U.S. IPOs over that four-year period.

IPO, meanwhile, aims to capture the top 80% of new IPO market cap. IPO buys stocks within 90 days of their first listing and holds them for two years. The ETF also has the ability to fast-track large new players into its portfolio; Lyft, for example, was added after only a week of trading.

That gives IPO more agility than FPX in a quickly evolving market, as well as the ability to ride out any blips or bumps that may occur in a new stock's first week or month of trading.

Unexpected Holdings In FPX

Another critical difference between the two ETFs is that if a given stock is acquired by or merged with an older, more mature company, FPX will then hold the stock of the acquirer/new merged entity.

That's resulted in some unexpected names in FPX's portfolio, such as Verizon, Stryker, Tyson Foods, Dow, Hershey and General Mills, all of which are companies that have been around for decades.

The above companies are all top 10 holdings in FPX—something that may come as a bit of a shock to investors looking for exposure to the newest names on the market.

For that reason, our ETF of the Week is IPO, a much purer play on the initial public offering space.

One last note: If you're curious about which ETFs hold a specific IPO, you can use our stock finder tool to learn how much representation any given stock—including recent IPOs—has inside U.S. ETFs.

Contact Lara Crigger at [email protected]

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