ETF for the Booming IPO Market

• By Michael Johnston
• On 2:41 pm EDT, Monday September 28, 2009

Michael Johnston submits:Last week was the busiest for initial public offerings in the U.S. in more than a year and a half, with seven IPOs raising more than $3 billion. The total was the highest since March 2008, when Visa’s (NYSE: V - News) $20 billion IPO led the way to a record-setting week. Companies going public last week included:

A123 Systems, Inc (NasdaqGM: AONE - News): The electric car battery maker saw its shares surge more than 50% on Thursday, despite boosting both the offering price and the number of shares offered.Shanda Games (NasdaqGS: GAME - News): Chinese computer game companySelect Medical Holdings : Operator of specialty hospitals and outpatient rehabilitation clinicsArtio Global Investors (NYSE: ART - News): Fund manager with nearly $50 billion in assets.

Colony Financial (NYSE: CLNY - News): “Vulture” private equity fund that buys troubled commercial property debt

Vitacost (NasdaqGM: VITC - News): An online health supplement retailer, Vitacost became the first e-commerce IPO since November 2007Apollo Commercial Real Estate Finance (NYSE: ARI - News): Invests in mortgage assets. According to the Wall Street Journal, the demand for IPOs may reflect “a scramble among money managers who had stayed on the sidelines during much of the recent stock rally.” Last week’s surge isn’t expected to be a blip on the radar: over the past two months 20 companies have filed registrations with the SEC, compared to only seven filings in the first seven months of the year.

ETF for IPOs

IPOs always attract massive attention, with investor demand often significantly exceeding supply. As a result, IPOs have historically surged in their first day of trading, often rising by more than 10% in their inaugural session. While gaining access to IPOs is an extremely competitive process, there is an ETF offering investors cheap, efficient exposure to a basket of newly-public companies. And while these companies may not continue to offer double digit daily returns beyond their first session, their results over their first several years as a public company stack up pretty well.

The First Trust U.S. IPO Index Fund (NYSEArca: FPX - News) tracks the IPOX-100 U.S. Index, which measures the average performance of U.S. IPOs during the first 1,000 trading days. FPX has gained about 31% this year, compared to only about 18% for [[IWV]], which tracks the broad Russell 3000 Index. Through the second quarter of the year, FPX a three-year annualized returns of about -6%, approximately 240 basis points better than the Russell 3000 ETF.

Many investors might expect an ETF that focuses on new public companies to be full of relatively unknown small cap firms. But because FPX is market capitalization weighted and seeks to track the performance of companies over their first 1,000 trading days, its 100 individual holdings include many mid cap and large cap companies. The five largest holdings of FPX include Philip Morris (10.3%), Visa (9.8%), MasterCard (5.8%), Covidien (4.6%), and Viacom (3.6%). FPX has a tilt towards technology companies (which account for nearly 30% of the fund), but is relatively well diversified in terms of sector exposure, with significant allocations to consumer discretionary and staples (12.6% and 17.0%, respectively), energy (8.6%), financials (8.3%), and health care (8.1%).

Disclosure: No positions at time of writing.

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