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ETF Investing

3 IPO ETFs to Maximize Exposure and Minimize Risk

Investors will remember 2019 as the year of the initial public offering (IPO).

It is remarkable how many high-profile companies went public this year. Uber (NYSE: UBER), Lyft (Nasdaq: LYFT), Slack (NYSE: WORK), Datadog (Nasdaq: DDOG), Pinterest (NYSE: PINS) and Dynatrace (NYSE: DT) are just a few of the nearly 200 companies that submitted IPO paperwork in 2019. Many more are in the pipeline like WeWork, Peloton and Airbnb.

It’s an IPO party, but not everyone is having a good time. Some IPOs are massive successes. Some are massive failures. It can be hard to tell which side a company will come out on.

Enter IPO ETFs (exchange-traded funds). IPO ETFs maximize your exposure to the IPO market while minimizing your risk of any flop. We’ll explain IPO ETFs and show you the top three to watch.

What is an IPO ETF?

ETFs track an underlying index. And there’s an ETF for everything these days. Airline ETFs, gold ETFs and even food ETFs. It makes sense that fund managers would see the value of an IPO ETF.

IPO ETFs are designed to give investors exposure to growing companies. IPOs are tricky for investors because of their unpredictability. There are certain factors, like profitability and revenue, that can indicate whether a company will be successful when it goes public. But overall, IPO investing requires more guesswork than some investors would like.

IPO ETFs remove some of that guesswork, as they follow a large index of IPOs. Rather than putting all of your eggs in one basket, you can have equity in a swath of newly public companies. This allows investors to:

  • Become more familiar with IPO investing
  • Maximize their exposure to the IPO market
  • Allow for more diversification in their portfolios.

The Origins of IPO ETFs

The first IPO ETF was the First Trust US IPO Index ETF, and it was launched in 2006. This fund was created in response to the many successful public offerings between 2004 and 2005. It is now known as the First Trust US Equity Opportunities ETF (NYSE: FPX).

Obviously, the attraction of IPO investing is that you can get in on the ground floor of a company with high growth potential. When investors saw Google-parent Alphabet’s (Nasdaq: GOOG) stock rise over 250% in the two years after its IPO, many were regretful they hadn’t purchased shares in 2004. Same goes for when Chipotle Mexican Grill (NYSE: CMG) went public in 2006, and the stock price doubled on its first day.

Obviously, investors don’t have a crystal ball telling them which companies will perform like Google and Chipotle. And no one knows which companies will fail drastically.

But in the early 2000s, investors were feeling two things: the pain of the dot-com bubble burst from a few years before and the jealousy of watching other investors hit it big on recent IPOs.

Plus, ETFs were gaining popularity around this time as well.

These factors created the perfect storm for IPO ETFs.

Risk-averse investors saw innovative companies posting big profits, but they had just been burned by a similar situation. Why should this time be different?

IPO ETFs provided a middle ground: maximizing exposure to companies with high growth potential and minimizing the risk of suffering major losses.

The Top 3 IPO ETFs to Watch

With the IPO market red-hot this year, let’s take a look at some of the best performing IPO ETFs.

First Trust US Equity Opportunities ETF (NYSE: FPX)

  • Assets Under Management: $1.2 billion
  • Expense Ratio: 0.59%

This IPO ETF tracks an equity index called the IPOX-100 US Index. This index includes the 100 best-performing and most liquid IPOs, and the index is reevaluated every quarter. The First Trust US Equity Opportunities ETF invests at least 90% of its net assets in the common stocks that comprise the IPOX-100.

The fund states that it has “historically captured around 85% of total market capitalization created through U.S. IPO activity during the past four years.” Additionally, the fund is great for buy-and-hold investors seeking timely and systematic IPO exposure.

Renaissance IPO ETF (NYSE: IPO)

  • Assets Under Management: $52.5 million
  • Expense Ratio: 0.60%

This IPO ETF tracks the Renaissance IPO Index. The Index reflects 80% of newly public companies based on market capitalization. Sizable IPOs are added to the fund immediately, whereas most other IPOs are added on a quarterly basis. Companies are removed from the index two years after they go public.

The Renaissance IPO ETF has outperformed the S&P 500 by 14% year to date, and is up 27% overall year to date.

Invesco S&P Spin-Off ETF (NYSE: CSD)

  • Assets Under Management: $120 million
  • Expense Ratio: 0.62%

This IPO ETF is based on the S&P U.S. Spin-Off Index which tracks companies that have been spun-off from a parent company within the last four years. The fund invests at least 80% of its total assets in securities that comprise the S&P U.S. Spin-Off Index.

With around $120 million worth of assets under management the Invesco S&P Spin-Off ETF is the second-largest IPO ETF in the U.S.

Action Plan

ETF investing is a good strategy in general. You get exposure to a variety of equities while minimizing risk. Investing in an IPO ETF could be a great way to maximize your exposure to high growth potential companies while minimizing the risk of failure.

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