IPO ETFs Are Heating Up

Initial public offerings (or IPOs) allow companies to raise capital and boost their profile among a wider pool of investors.  One of the more successful IPO stories this year has been the jump in market value of burger chain Shake Shak Inc (SHAK).  Conversely, online marketplace provider Etsy Inc (ETSY) has seen share prices dive since its recent stock exchange debut. 

While there are numerous instances of hits and misses in newly minted IPOs, exchange-traded funds that track these stocks appear to be showing solid progress this year. 

The First Trust US IPO Index Fund (FPX) tracks a basket of 100 stocks ranked by market capitalization in the IPOX Global Composite Index.  This index uses a rules-based screening methodology to select the stocks with the best average performance within the first 1000 trading days.

So far this year, FPX has jumped nearly 10 percent and recently hit new 52-week highs.  Much of this strong momentum can be attributed to the strength in consumer discretionary and technology stocks, which make up over 46 percent of the total portfolio.  

Because of the multi-year screening threshold, this ETF can hold companies that can have been public for some time.  Facebook Inc (FB) is still the largest holding in FPX and has gained over 7 percent so far this year.  FPX currently has over $660 million in total assets and charges a net expense ratio of 0.60 percent. 

Another IPO fund with an alpha-seeking mentality is the Renaissance IPO ETF (IPO).  Stocks within IPO can be introduced as quickly as 5 trading days after their public debut, which was the case with Alibaba Group Holding LTD (BABA).  In addition, stocks are excluded after they exceed 500 a trading day limit. 

This keeps the portfolio fresh with newer stage public companies that are evaluated on a quarterly basis.  Other factors involved in the selection process include market cap, liquidity, and free float.  Currently there are 56 holdings in this ETF, of which 77 percent are large-cap stocks. 

So far this year, IPO has jumped over 10 percent and shown it has what it takes to keep pace with the more established FPX.  This ETF also charges a similar 0.60 percent expense ratio as well.

With stocks continuing to press higher, these ETFs represent a unique opportunity to reach new companies in a diversified investment vehicle.