IPO Market Heats Up: ETFs In Focus

After a slow start to the year, the U.S. IPO market is now heating up with nine new listings that will collectively raise $1.15 billion this week. This will mark the busiest week of this year. In particular, the technology sector has been at the forefront with digital ad technology company Trade Desk (V:TTD) making a strong debut yesterday and gaining more than 67% on the first day of trading. This suggests investors’ strong appetite for hot IPOs (read: IPO ETFs Soft in Q1: Will They Firm Up in Q2?).

What’s Hot on Wheels?

The IPOs that have provided investors a shot in the arm this week include low-cost cosmetics supplier - E.l.f. Beauty (TO:ELF) - and a bank - Capstar Financial (KA:CSTR) – that are set to debut today. Quick-lube chain and auto lubricant maker Valvoline (VVV), cloud software vendor Apptio (APTI), data analysis software provider Gridsum Holding (GSUM), Switzerland-based biopharmaceutical firm AC Immune (ACIU) and a private cellular network provider Full Spectrum (FMAX) will debut on the market on Friday.

Apart from these, investors also seem interested in the long-awaited public offering of hyperconverged software wrangler Nutanix (NTNX), which is set to get listed on the Nasdaq on September 30. IPOs slated for the next week include health IT company Tabula Rasa Healthcare (TRHC), a real estate investment trust Medequities Realty Trust (MRT), Alliance MMA (AMMA) and Fulgent Genetics (FLGT). With these listings, September will be the busiest month of the year in terms of stock market debuts.

Investors looking to profit from this surge should invest in these IPOs. While not all might be successful and investing in many at the same time could be difficult, investors should bet on the following two IPO ETFs that offer a low-risk and diversified exposure to newly minted companies (see: all the Total Market U.S. ETFs here).

First Trust US IPO Index Fund (TO:FPX)

This ETF focuses on the largest, best performing and most liquid U.S. IPOs and follows the IPOX-100 U.S. Index. New companies can find entry into the fund’s holding after trading for a minimum of 100 days. In total, the fund holds 100 securities in its basket with the largest allocation going to the top two firms – The Kraft Heinz Company (KHC) and AbbVie (ABBV) – with over 9% share each. Other securities hold less than 7% of the assets.

The product has a nice mix of sectors, with the top four being information technology, health care, consumer staples and consumer discretionary. The fund has accumulated $570.6 million in AUM and sees volume of about 51,000 shares per day. It charges 60 basis points (bps) in fees a year.

Renaissance IPO ETF (LON:IPO)

This fund provides exposure to the largest and most liquid newly listed companies by tracking the Renaissance IPO Index. New companies seek inclusion on a ‘fast entry basis’ on the fifth day of trading. The fund holds 56 stocks in its basket with double-digit exposure to Alibaba (NYSE:BABA) and Citizens Financials (CFG). Other firms hold less than 6.4% of the assets. From a sector look, financials and technology are the top sectors accounting for 28.8% and 24.6% share, respectively, while healthcare and industrials round off the next two spots with double-digit allocation each.

The fund has amassed $12.4 million in its asset base while it trades in light volume of less than 3,000 shares, probably implying additional cost beyond the expense ratio of 0.60%.

A Good Bet?

Despite the quite a few offerings this week and the next, 2016 will likely be the weakest in many years. Nevertheless, investors could enjoy the success of new listings given that 78% of the U.S. IPOs are trading above their offer price, thanks to the successful debut of many tech firms (read: Alarm Bells Ringing for IPO ETFs?).

The two most successful IPOs include Acacia Communications (NASDAQ:ACIA) and Twilio (NYSE:TWLO) that are up 396% and 281%, respectively, to date from their listing price. Meanwhile, Talend (NASDAQ:TLND) and Everbridge EVBG have risen 41% and 37%, respectively. As a result, both above-mentioned ETFs have outperformed the broader market fund (AX:SPY) by a wide margin.



Want more information on the world of ETFs? Make sure to check out the podcast below where we discuss the investing landscape with Kevin O’Leary and Connor O’Brien of O’Shares Investments:

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