Real IPO Pop Is In This ETF

Companies have raised the most money in IPOs ever amid insatiable investor demand.

A record year for initial public offerings is set to end on a high note, bucking what is normally a quiet end-of-the-year period for stock debuts.

DoorDash, an on-demand food delivery service; Airbnb, a vacation rental marketplace; and C3.ai, a software company, all went public this week, raising billions of dollars.

The billions raised by these companies added to an already record year for IPOs. According to data from Bloomberg and the Wall Street Journal, more than $150 billion has been raised in IPOs on U.S. exchanges so far this year, surpassing the $108 billion raised in 1999 and the $106 billion raised in 2000.

SPAC Attack

Of this year’s record haul, nearly $82 billion has been picked up by special purpose acquisition companies. SPACs, which are also known as blank check companies, have raised more money this year than in the past 10 years combined.

SPACs raise money in the hopes of merging with private companies, offering a quicker, more guaranteed path to the public markets for those companies than if they went through the traditional IPO process.

They have historically had a reputation of bringing low quality, speculative companies to market. But several successful SPAC mergers this year—like those that brought DraftKings, Virgin Galactic and Hyliion public—have piqued investors’ appetite for this up and coming asset class.

Window Wide Open

It’s not by random chance that 2020 turned out to be the year in which the two-decade-old IPO record was broken. The window for IPOs has never been wider thanks to:

• A strong need to raise money by some companies to weather the pandemic
• Companies in general taking advantage of the surging stock market and the highest valuations since the dot-com bubble
• Record-low interest rates pushing investors to reach for returns
• Insatiable demand for growth stocks, including SPACs
• Fed policies backstopping the markets and reducing risk
   

IPO Pops Holding

These factors together have pushed companies to go public this year, and they have been met by enthusiastic buying by investors. Indeed, new IPOs have been among this year’s best-performing stocks.

Cloud data warehouse company Snowflake, which IPO’d to much hype in September, is already up 65% in less than two months on the market—and that’s up 65% from its first close. For investors lucky enough to get an allocation to the IPO shares, the stock is up 250%.

CureVac, a European biopharma company developing a COVID-19 vaccine, is up 128% since its first day of trading in August; and Lemonade, an “insurtech” company, is up 31% since its debut in July.

Hot IPO ETFs

Just as individual IPOs have done well this year, so too have ETFs focused on newly listed stocks. The biggest, the $1.9 billion First Trust U.S. Equity Opportunities ETF (FPX) is up 46.2% year to date, while the smaller $562 million Renaissance IPO ETF (IPO) is up 115.1%.

To be clear, the bulk of the gains in these ETFs came from stocks of companies that IPO’d a year or two ago, but they are constantly adding new issues as they come to market.

Each of these ETFs takes a different approach to targeting the IPO market. 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. Current top holdings include Snap Inc., Uber Technologies and Zoom Video Communications.

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, while other IPOs are added during scheduled quarterly reviews. Its top positions are Moderna, Uber and Zoom.

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 Eli Lilly, Dow Inc., Dell Technologies, Kroger and ViacomCBS, 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.)

Int’l IPO ETFs

Whereas the aforementioned FPX and IPO focus on U.S. companies, each ETF has a counterpart that provides exposure to international IPOs.  

The $565 million First Trust International Equity Opportunities ETF (FPXI) and the $34 million Renaissance International IPO ETF (IPOS) are up 60.7% and 41.7%, respectively, on a year-to-date basis.

Top holdings for FPXI currently include Saudi Arabian Oil Co., Adyen, Sea Limited, Meituan and WuXi Biologics.

IPOS’ top positions are Meituan, SoftBank, Innovent Biologics, Knorr-Bremse and SIG Combibloc.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2