Initial Public Offerings can be very profitable and very costly for investors. A new hot company coming to the public markets can cause quite a bit of a stir on Wall Street and the first day “IPO pop” usually soon fades making investing in IPO’s a difficult way to make money. But, a few ETF’s focusing on IPO’s can offer investors a safer way to play IPO’s.
Some may remember the weeks leading up to Facebook’s (FB) IPO when the media built hype and hysteria around the event. Then the day finally came and the stock price faltered and actually fell below the IPO price. Many called it a failure as investors buying into the social media company on day one actually watched as their newly minted shares lost value. (I personally thought it was a win for Facebook considering they raised top dollar for their shares, which is the point of going public, and didn’t seem to leave any money on the table. But that’s for another day.)
The first 14 months shares of Facebook traded lower than they did on day one. But at the end of year two as a public company, May 12, 2014 the stock was up 81%. Investors who held off on buying Facebook for a few days, then got in and took the ride, beat the S&P 500 by nearly 40% over just those first two years and more than 115% if they still held the stock.
A more recent example of a day-one IPO stock pop is the online marketplace company called Etsy (ETSY) whom went public on April 15. The IPO price was set at $16 per share and after jumping more than 100% on day one closed up 88%. Fast forward to today though and the stock is trading at $14 per share, below its IPO price and well off its $35.74 per share high. Time will only tell if Etsy can pounce back like Facebook did, but the point is, IPO’s are risky, especially the higher profile ones.
The biggest issues with newly public companies are that Wall Street may have unrealistically high expectations for the new company, the company may not fully understand what it is Wall Street is looking for, management doesn’t fully understand how to handle analysts and how to rein in expectations to a realistic level and maybe the most important one slowing growth after the IPO happens. This last one is very common as a company preparing to go public will boost growth rates, sales figures and other important metrics as high as they can just before going public so that they can impress investors and get top dollar for their stock price. All these factors plus more contribute to stock prices falling the first few days, weeks, and or months after going public.
But the strong properly management companies that truly have what it takes to make it as a public company can and will rebound if their share price falters shortly after going public. The biggest problem investors have though, is figuring out whom those winners are going to be.
And that is where ETF investing comes into play. By buying an ETF comprised of newly IPO’d companies, and investor can spread out their exposure and lower their risk. A basket of a few hundred recently public companies is much safer than just cherry picking which ones will pop and stay high, and which ones will falter and die. So let’s take a look at three ETF’s you can own whom strictly own recently IPO’d companies and only hold them for a certain number of years.
The first one I would like to highlight is the Renaissance IPO ETF (IPO). This ETF strictly invests in companies listed on the US exchanges, even if they are foreign companies. The ETF will buy shares of highly liquid stocks with a market capitalization of $100 million or more five days after they are first listed. This is good because in most cases the stock price is slightly lower five days after going public than what it may have popped to on their first day. Then shares will be owned for 500 trading, before being sold. The fund also will periodically rebalance its holdings. The ETF has a 0.6% expense ratio and yield of 2.17%. Over the past year the year IPO is up 8.02% compared to the S&P 500’s return of 7.73%.
The next one is Renaissance International IPO ETF (IPOS) which buys recently IPO’d stocks which are listed on international exchanges, even if they are US based organizations. The ETF has a total expense ratio of 0.8% but is the same as IPO in when it buys and sells shares of companies and nearly every other form. This fund is a decent way for investors to gain international exposure and dabble in the IPO market.
Lastly, we have first Trust US IPO Index Fund (FPX). While the previous two IPO ETF’s have only been available to investors for the past few years, this ETF has been around since 2006. Over the past five years its share price has risen more than 196% while the S&P 500 has only climbed 106%. It also has an annual expense ratio of 0.6%, offers a 0.67% yield and is up more than 8.5% year to date. The ETF strictly invests in stocks offered on US exchanges. Another interesting difference is that FPX holds its stocks for four years prior to selling after their IPO.
So the next time you want to jump into a hot IPO on day one, calm your emotions, and buy an IPO focused ETF. You will get the exposure to the IPO you are looking for, but reduce your risk on owning a single stock and likely save yourself a lot of stress as the stock experiences its first few months as a public company.
Matt Thalman
INO.com Contributor, ETFs
Follow me on Twitter @mthalman5513
Disclosure: At the time of this writing, Matt Thalman was long Facebook (NASDAQ:FB). This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
