New IPO ETF Certain to Gain Traction, More IPO ETF Competition

24/7 Wall St.

The saying is that if there is a trading strategy, then there is an ETF strategy for that as well. Now the markets are getting a new exchange-traded fund strategy aimed at tracking the world of initial public offerings. Renaissance Capital already manages the actively managed Global IPO Plus Aftermarket (IPOSX) mutual fund. Now it has formally launched the Renaissance IPO ETF (NYSEMKT:IPO) for investors looking for ETF liquidity with an IPO after-market strategy. This ETF is very different from the First Trust US IPO Index (FPX), yet it may be serious competition for existing ETF.

Renaissance's mutual fund purchases IPOs on the offering and in post-IPO trading to provide investors with access to the possible returns from IPOs. If you have been following the recent flow of IPOs, 24/7 Wall St. recently covered the 14 hottest IPOs of 2013, and these all had 50% or higher gains in their first trading day. Some were more than 100% gains in that first day. This may be enticing the investor demand underpinning the new ETF launch.

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The Renaissance IPO ETF seeks to bring access to the most economically significant newly public companies. It follows a rules-based index, the Renaissance IPO Index. Under the rules it targets the most liquid newly listed U.S. stocks that came public via initial public offerings. It should be known that, for this ETF, new additions of stocks are made (in the index) on what is called a fast-entry basis, but not until the fifth day of trading. Some post-IPO inclusions are also made on quarterly review. These companies also are removed after two years of trading as a post-IPO company, when they are considered to be "seasoned stocks" by the fund and index manager's rules.

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As of September 30, 2013, the top holdings and weighting of each holding were as follows:

  • Facebook Inc. (FB) at 10.88%
  • Zoetis Inc. (ZTS) at 10.06%
  • Delphi Automotive PLC (DLPH) at 9.75%
  • Michael Kors Holdings Ltd. (KORS) at 9.61%
  • Realogy Holdings Corp. (RLGY) at 5.41%
  • Workday Inc. (WDAY) at 4.45%

These compositions will change through time, particularly as these post-IPOs gain or lose in share price and as the stories mature. Other key holdings are listed as Spirit Realty Capital Inc. (SRC), Splunk Inc. (SPLK), Whitewave Foods Co. (WWAV), Retail Properties of America Inc. (RPAI) and more that give the current mix of holdings a total of 49 stocks.

Note that another "IPO ETF" strategy has traded already. The First Trust US IPO Index (FPX) trades more than 60,000 shares per day. This is a bit different in that it tracks the IPOX-100 U.S. Index, which is a modified value-weighted price index tracking the performance of the top 100 companies ranked quarterly by market capitalization in the IPOX Global Composite Index. Its Top 10 holdings are different, and we have shown each with the weighting as follows:

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  • Facebook Inc. (FB) at 10.90%
  • AbbVie Inc. (ABBV) at 8.91%
  • General Motors Co. (GM) at 6.62%
  • Kinder Morgan Inc. (KMI) at 4.43%
  • Phillips 66 (PSX) at 4.43%
  • Kraft Foods Group Inc. (KRFT) at 3.79%
  • Tesla Motors Inc. (TSLA) at 2.72%
  • Marathon Petroleum Corp. (MPC) at 2.61%
  • HCA Holdings Inc. (HCA) at 2.50%
  • Dollar General Corp. (DG) at 2.24%

The First Trust ETF has a gross expense ratio of 0.65% and a net expense ratio of 0.60%. The new ETF from Renaissance shows that its total expense ratio (gross) is 0.60%. As you can see, there are now two post-IPO ETF strategies for investors. These two ETFs are very similar in the fee structures yet are very different in composition. In fact, the current term sheets show that Facebook Inc. (FB) is currently the only overlap among the very top holdings.

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