5 Reasons Why 2018 Could Be Good For IPO ETFs

After a subdued 2016, the U.S. IPO market catapulted in 2017. The rise was credited to a surging stock market, improving economic fundamentals and increasing consumer sentiment that led to the appeal for new stocks with high growth potential.

According to Renaissance Capital, global IPOs have raised $141 billion so far in 2017, up 33% from 2016. The median deal size was $207.2 million in the year versus $185.9 million in 2016, though several big IPOs could not stock on to the debut prices and hurtled down eventually.

Overall, the year was decent with First Trust US Equity Opportunities ETF FPX and Renaissance IPO ETF IPO adding about 34.4% and 25.3% so far this year (as of Dec 20, 2017). Financial companies have been at the top spot in 2017 IPOs, making up about 21% of all proceeds.

Now, the continuance of the bull market and high hopes of tax reform has made the IPO market stronger going into 2018. As per Reuters, multi-billion-dollar firms including Airbnb and Spotify are largely expected to hit headlines with their initial public offering. The S&P 500, the Dow Jones Industrial Average and the Nasdaq are on their way to seal the year with their largest annual returns in four years (read: 7 ETF Picks as Nasdaq Hits 7,000).

Against this backdrop, we highlight a few reasons why 2018 could be a great year for IPO ETFs.

Improving U.S. Economy

The Fed has now forecast U.S. economic growth of 2.5% for 2017, up from 2.4% projected in the September meeting. The GDP guidance for 2018 was also beefed up from 2.1% to 2.5%. The PCE inflation guidance was upped to 1.7% by the end of this year, from 1.6% guided in September.

Trump Bump

The Trump rally and higher corporate earnings charged up U.S. markets lately. Now the tax reform or the slashing of corporate taxes from 35% to 21% would likely to push earnings higher. The IPO mood should also perk up. This along with an improving U.S. economy, as being witnessed now, should take the IPO momentum forward (read: ETFs to Bet on the Final Tax Bill: What Hot, What's Not).

Fed Activity

Though the Fed raised rates several times this year and may enact three more rate hikes in 2018, the tone of the Fed is not yet super hawkish. With Fed officials sticking to their outlook for three more rate hikes in 2018 despite speeding economic growth, there was no spark in the guidance issued in the December meeting.

So, the door is still open for investing in IPOs with borrowed money. On the other hand, if the Fed speeds up tightening, bond yields may go up considerably, which in turn will dull the appeal of debt financing and promote IPO. In fact, both ways IPOs should gain traction (read: ETF Winners & Losers Post Partly Dovish Fed Meet).

Unicorn Companies

Many "unicorns", or small- and mid-sized firms valued at more than $1 billion, may aim for listing in 2018, quoted on Reuters. According to consultancy firm CB Insights, 14 unicorns launched IPOs globally this year, against eight in 2016 and 10 in 2015. Most of those companies debuted in the United States. Ernst & Young too sees an uptick in unicorn IPOs in 2018. Market watchers are of the view that several cybersecurity IPOs are likely given the rise and demand of the space.

Foreign Companies' Hot Spot in U.S.

Foreign companies eye United States as a hot spot for IPOs. "About a quarter of listings on U.S. exchanges in 2017 were by overseas firms, led by China," as per Reuters. Next year could be the same for the U.S. IPO market. Chinese smartphone maker Xiaomi may be up for a IPO next year, according to a recent Bloomberg report.

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