U.S. Markets close in 6 hrs 27 mins

First Trust Plans International Edition of IPO ETF

Zacks Equity Research

First Trust seems poised to replicate its domestic success on the international level. While the issuer rolled out the global version of Dorsey Wright Focus 5 ETF (FV) in July, it also filed for an international version of its very own IPO ETF – First Trust US IPO Index Fund (FPX) recently (read: First Trust Rolls Out Global Version of Focus 5 ETF). The new ETF is supposed to trade under the name of First Trust International IPO ETF and we have highlighted some of the details below.

Proposed Fund in Focus

The planned fund will track the IPOX International Index. The market-cap weighted price index measures the performance of the top 50 non-U.S companies, which have most liquid IPOs and spin-offs. The Index has traditionally reflected around 75% of the total market capitalization in the IPOX Global Composite Index. No single component will account for more than 10% of the total assets. The expense ratio is yet to be disclosed.

How Does it Fit in a Portfolio?

This proposed product could be an interesting choice for investors seeking exposure to IPOs in the international market.  The IPO market continues to be hot this year globally. An improving global economy, extremely low levels of interest rates in many developed nations and an even more impressive performance by the stock markets led to this surge.

As per Renaissance Capital, quarterly proceeds from the global IPO market jumped 42.4% in the second quarter of 2014 with European proceedings constituting around 43.7% of the total activity.

North America took the second spot at 34.9%. European equity issuance advanced at a fast clip thanks to its emergence from a prolonged debt-crisis last year, per the research agency (read: After GoPro, What's Next for IPO Market and ETFs?).

Also, there has been an IPO frenzy this year among Chinese companies. The second quarter has seen 10 Chinese companies hitting U.S. exchanges according to Renaissance Capital. Not only this, 10 of the biggest Chinese companies, through with their U.S. IPOs in over one year, have generated an average of return of 44% since they were on offer, per Bloomberg

Amid such a situation, investors would definitely take interest in IPO related ETFs. However, it makes investors susceptible to cyclical trends of the broader markets as IPO activities may boom or bust according to bullish and bearish market sentiments (read: Cooling IPO Market Puts These ETFs in Focus).

Can it Succeed?
The proposed ETF does not have any direct competitor due to its unique strategy. There are at present two products operating in the market on the IPO theme. These are FPX and Renaissance IPO ETF (IPO).
FPX provides exposure to the booming U.S. IPO market by tracking the IPOX-100 U.S. Index. The fund has accumulated $478.9 million in AUM since it debuted in 2006.

On the other hand, IPO is a relatively new entrant in the space and has attracted $26.8 million in its asset base since its launch last year. Both ETFs have an expense ratio of 0.60%. So, the proposed fund needs to charge competitively to attract investors’ attention.

However, both IPO and FPX are mostly focused on the U.S. market with little share left for foreign nations. Contrarily, the proposed fund will solely be exposed to foreign stocks.

Also, IPO and FPX are essentially all-cap equities ETFs whereas the suggested fund will give preference to market capitalization. Given such broad variations, we anticipate that the fund, if ever approved, will not face difficulty in developing a following, especially if the IPO market remains hot.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Read the analyst report on IPO

Read the analyst report on FPX

Read the analyst report on FV

Zacks Investment Research

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report