ETFs: Stick With the Tried and True, Tom Lydon Says

With the much-hyped LinkedIn (LNKD) IPO having priced last week, an ETF designed to capture the IPO market, or at least the money of retail investors hoping to gain from IPOs, has been getting a lot of attention.

The ETF, the First Trust US IPO Index (FPX), holds the stock of theoretically newly minted shares. To get the low-down on this and other ETFs, Breakout brought in Tom Lydon, the editor of ETFTrends.com.

Lydon explains the IPO ETF as "an index based on 100 IPOs." Alas, "it's cap-weighted, meaning a small number" of stocks will have an unusually large impact on the ETF. Translated into human-being, that means a $10 billion (and dropping) company such as LinkedIn will have a much greater influence on the ETF than the vast majority of newcomers. Add to that the fact that "new" is a relative term in the long moribund IPO market, and you've got an ETF selling itself as a vehicle to invest in new and sexy shares, but actually holding companies such as Visa (V), a $62 billion juggernaut public since 2008.

Fortunately, says Lydon, it's easy for retail investors to "look under the hood" of an ETF, simply by going to the parent company's website, or ETFTrends.com and doing some homework. When asked about some of the crazier ETFs on the market, Lydon describes them as outliers. "Inverse and levered ETFs are a whole different ballgame," he says.

Lydon points out that the ETF industry is a trillion-dollar business now with the top-25 funds accounting for over $600 billion of that total. He says retail investors who do their homework and stick to the "tried and true," more vanilla ETFs should have no problem getting stable and reputable exposure to sectors of their choice.

As is so often the case in all things equity, the sizzling ideas like an IPO ETF get all the attention, but the smart money only eats up the steak.

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