Will IPO ETFs Stay Hot?

2013 was an excellent year for the U.S. IPO market -- delivering its best performance in more than a decade. This trend will likely continue this year given a surging stock market, improving economic fundamentals and increasing consumer confidence.  
 
As per IPO research intelligence Renaissance Capital, 2013 was the banner year for the IPO market, as 222 companies completed their IPOs, raising nearly $55 billion. Total number of IPOs in 2012 and 2011 was 128 and 125, respectively. Most of the companies that went public last year have outperformed the broad markets and many generated triple-digit returns.
 
The two most successful IPOs last year were from healthcare sector. Insys Therapeutics (INSY), specialty pharmaceutical company, and GW Pharmaceuticals (GWPH) surged about 384% and 366.7%, respectively, since their debut on May 2 (read: 3 Hot Sector ETFs for 2014).  
 
In terms of proceeds raised, energy companies topped the list with 22 deals worth $10.7 billion, closely followed by financial companies with 45 deals worth $10.2 billion. The healthcare sector trailed technology at the third position with 54 deals valuing $8.6 billion, largely driven by the biotech space.
 
What Lies Ahead?
Similar to last year, 2014 will also likely be favorable for the IPO market. This is because China’s ecommerce giant Alibaba Group is expected to go public with the biggest technology IPO ever, exceeding Facebook (FB). The third-largest U.S. automaker, Chrysler, would also go public sometime in the first quarter of this year.
 
Further, investors also seem interested in the IPOs of a bunch of other well-known companies like Silicon Valley, online coupon sites –coupons.com and Ebates – site mobile payments provider – Square – file storage companies – DropBox and Box – as well as photo-sharing website Pinterest (read: Track Initial Public Offerings with this New IPO ETF).
 
While investing in many IPOs at the same time could be difficult, investors could easily tap the IPO resurgence with the two ETFs discussed below:
 
First Trust US IPO Index Fund (FPX)
This ETF provides exposure to the booming U.S. IPO market by tracking the IPOX-100 U.S. Index. The fund has accumulated $363.9 million in AUM and sees volume of just under 100,000 shares per day. It charges 60 bps in fees a year.
 
In total, the fund holds 100 securities in its basket with the largest allocation going to Facebook, AbbVie (ABBV) and General Motors (GM) that collectively make up for 26.18% share. Other securities do not hold more than 5.17% share. Since the ETF focuses on 100 largest and most liquid U.S. IPOs, new companies can find entry into the fund’s holding after trading for a minimum of 100 days.
 
The product has a nice mix of sectors, with the top four being consumer discretionary, information technology, energy and healthcare. FPX gained nearly 42% in 2013 and added 0.07% year-to-date (read: 3 Niche ETFs Crushing the Market).
 
Renaissance IPO ETF (IPO)
This is a newly added product in the space that has attracted $25.2 million in its asset base since its debut nearly three months ago. The ETF sees moderate volume of nearly 58,000 shares, ensuring additional cost beyond the expense ratio of 0.60%.
 
Holding 60 stocks in the basket, the fund follows the Renaissance IPO Index, which holds the largest and most liquid newly listed U.S. initial public offerings. New companies seek inclusion on a ‘fast entry basis’ on the fifth day of trading. Currently, the product allocates more to FB at 10.38%, closely followed by Zoetis (9.52%) and Realogy Holdings (5.49%).
 
From a sector look, technology stocks make up for one-third share while consumer cyclical, healthcare, real estate and energy account for double-digit exposure. The fund has added nearly 6% since inception (read: 4 Best New ETFs of 2013).
 
Bottom Line
Considering the most anticipated offerings this year, investors seeking to take advantage of the new growth stocks could definitely bank on these two ETFs. The huge success of the new listings and a prosperous IPO industry would further drive the funds.

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