Alibaba IPO Puts the Spotlight on the IPO ETF
Alibaba’s much ballyhooed initial public offering is just one day away and, to put things mildly, the Chinese e-commerce firm’s debut as a public company could prove to be a game-changer for several highly focused exchange traded funds.
On that list is the Renaissance IPO ETF (IPO) . IPO, which is 11 months old, has been home to such widely followed new stocks as Facebook (FB) in its brief time on the market. With Facebook being over two years removed from its public debut, IPO’s top spot is currently an almost 11% weighting to Twitter.
Expect Alibaba to become IPO’s largest holding and quickly ascend to that spot. In an interview with ETF Trends from the Morningstar Conference in Chicago, Renaissance Capital Principal Kathleen Smith said based on Alibaba’s expected market value, now forecast to be nearly $22 billion at Friday’s open and the size of Twitter, it is likely Jack Ma’s company makes a big entrance into IPO, immediately becoming the ETF’s largest position. [What Alibaba's Valuation Means for ETFs]
IPO’s underlying index, the Renaissance IPO Index (IPOUSA), gives the ETF the flexibility to add stocks after just five trading days. While a rival product’s index provider has since said it will add Alibaba after Friday’s close, there are advantages to IPO waiting five days before adding hot IPOs. [An ETF That Will Fast Track Alibaba]
“Adding a stock after its fifth trading day allows for better price discovery of an IPO,” said Smith. With that, investors can be assured IPO will feature Alibaba among its holdings at the open of U.S. markets on Friday Sept. 26.
Expectations of Alibaba’s rapid ascent within IPO is bolstered by the following factoid: Nearly all IPOs over the past 15 years valued at over $1 billion have risen an average of 12% on the first trading day, according to Smith.
Another issue facing Alibaba’s inclusion in indices used by ETFs is how index providers will classify the stock: As a consumer discretionary or technology company. Some index providers have already expressed they will add Alibaba to tech-focused indices if the company meets with a discretionary classification. [Alibaba Will Join This ETF]
Smith said IPO will likely treat Alibaba as a consumer discretionary stock, which is pivotal when considering the comparisons of Alibaba to Amazon (AMZN). Thing is Alibaba has an EBITDA margin of 57.8% compared to 6.9% for Amazon.
Alibaba does have game-changing potential for an ETF like IPO, but it is not the only ace up the sleeve of Renaissance Capital. IPO, which is up 4.1% over the past 90 days compared to a roughly 3% for the S&P 500, is soon to get a cousin. [Facts Behind IPO ETFs]
Renaissance Capital has filed plans for the Renaissance Capital International IPO ETF. That ETF, with a launch date that though not specific can be characterized as imminent, will provide investors with an avenue to tap into IPO listed outside the U.S., nearly three-quarters of which will hail from developed markets.
Renaissance IPO ETF
