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IPO ETFs Soft in Q1: Will They Firm Up in Q2?

Zacks Equity Research

The year 2016 hasn’t been a good one for the IPO market with 1H16 being the worst first-half of any year since 2009 in terms of the number of companies going public, as per Bloomberg data. So far this year, about 42 IPOs have been priced in, representing a year-over-year decline of about 60%. Of these, total proceeds are $6.2 billion, down about 66.5% from last year, as per Renaissance Capital.

However, the enthusiasm of going public picked up from May. In fact, the second quarter has seen about 30 IPOs, compared with just nine in the first quarter. Apprehension surrounding the Brexit fallout and general growth issues are likely to keep the markets choppy ahead, making backdrop for IPOs unsteady. Then what is behind the renewed momentum (read: UK Votes for Brexit: ETFs Winners & Losers)?

Behind The Recent Surge in Interest

As per analysts, sponsors of companies are acting considerately on IPO pricing given shaky investor sentiment. Such subdued pricing at times gives a big pop to shares on debut trading, going by a Wall Street Journal article.

Probably due to this benign pricing trend, companies debuting on the stock market in 2016 are up 16% on average from their offer price, underscoring year-over-year improvement. Investors should also note that “companies that went public in 2015 are currently down 11% from their IPO prices” through July 6, according to Dealogic.

In a nutshell, U.S. IPOs lost steam and slowed down, mainly due to market upheaval and overvaluation concerns. Most analysts are of view that only smart pricing will hold the key for IPOs to win in the present erratic market and that there will be higher levels of public offerings in the second half of 2016 (read: Should You Buy IPO ETFs on Busy Activity?).

Some of the companies that are preparing for IPOs in the second half are Spotify, Jose Cuervo, Blue Apron, Domo, First Hawaiian Bank and Optiv Security as per Renaissance Capital.

Moreover, this calmness has resulted in pent-up demand for IPOs. And once the market gains momentum, the IPO mood should also charge up, though chances of this happening in the near term is less likely.

At the current level, investors believing in and seeking to cash in on the low-key IPO pricing trend, can play the below-mentioned ETFs.

First Trust US IPO Index Fund FPX

This ETF provides exposure to the booming U.S. IPO market by tracking the IPOX Global Composite Index. The index measures the average performance of U.S. IPOs during the first 1000 trading days. Currently, three firms – Kraft Heinz Company, Facebook and AbbVie – dominate the fund’s returns. The product has a nice mix of sectors, with the top four being information technology, health care, consumer discretionary and consumer staples. It charges 60 bps in fees a year.

Renaissance IPO ETF IPO)           

This ETF follows the Renaissance IPO Index.Currently, the product holds 52 securities in its basket with the largest allocation going to Alibaba (10.44%), Synchronyfinancial (8.9%) and Citizens Financial Group (8.87%).

From a sector look, technology stocks make up for one-fourth share while financials and health care round off the next two spots with double-digit exposure. It charges 60 bps in annual fees.

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RENAIS-IPO ETF (IPO): ETF Research Reports
 
FT-IPOX 100 (FPX): ETF Research Reports
 
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