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Lyft Falls, But “IPO” Gains: A Case for Choosing ETFs Over Stocks

This article was originally published on ETFTrends.com.

In only its second day of trading, the Lyft IPO fell 10 percent, falling below its initial $72 per share offering while the Renaissance IPO ETF (IPO) gained 1.20 percent--a prime example for choosing ETFs over individual stocks in a hit-or-miss IPO sector.

“I was surprised that it blew through the IPO price so quickly,” said David Erickson, a finance professor at Pennsylvania University’s Wharton School.. “While there was a lot of enthusiasm on Friday, it’s obviously been dampened today, and it’s hard to recreate that moment once you lose it, in the near term.”

IPO is up over 31 percent year-to-date. Its top holdings speak to the diversity of its portfolio, which includes Elanco Animal Health, VICI Properties, Spotify Technology, and Okta--all from various sectors.

IPO seeks to replicate the price and yield performance of the Renaissance IPO Index, which is a portfolio of companies that have recently completed an initial public offering (“IPO”) and are listed on a U.S. exchange. As of March 25, IPO’s holdings include Elanco Animal Health, VICI Properties, Spotify Technology, and Okta.

ETF investors can also look at other funds like the  Invesco NASDAQ Internet ETF (PNQI) and the First Trust US Equity Opportunities ETF (FPX) to get a piece of the IPO action. These options can certainly provide investors with the distinct advantages of investing in ETFs as opposed to individual stocks.

 Related: Impressive Streaks Inside Mid-Cap Dividend ETF ‘REGL’

The Diversification Advantage

Like stocks are shares or fractional ownership of a company, the ETF owns underlying assets and divides ownership of those assets into shares. As such, these shares can be bought and sold on a major exchange like the New York Stock Exchange.

Furthermore, as opposed to ownership of a company, ETFs own the actual stocks themselves. As such, ownership of an ETF offers diversification advantages compared to single stocks.

Stocks are exposed to all of the risk associated with ownership of that particular company. Conversely, an ETF that purchases a mix of stocks or other assets will have less risk exposure.

As stated, because of this flexibility, they can be traded intraday. This allows investors to trade them through online or traditional brokers just like stocks.

An ETF shareholder is also entitled to income earned through dividends. In the event the fund is liquidated, ETF shareholders may also receive a portion of its residual value, which is the value determined at the end of an asset’s useful life.

Concentrated Sector Exposure

Investors who want to obtain a concentration in a certain sector like IPOs would have to buy individual stocks that comprise that sector, which could add up in brokerage fees. However, with a single ETF, an investor can gain sector exposure since the fund contains a basket of shares containing various stocks as opposed to a single stock.

For example, an investor who wants to gain exposure to semiconductors in general would need to build a portfolio that may contain the leaders in that particular industry. Furthermore, an investor may just want exposure to medium-sized and foreign semiconductor companies.

This type of investor focus would require purchasing individual stocks to meet that criteria. Additionally, ETFs can give investors exposure to other asset classes.

An investor who wishes to invest in fixed income must purchase bonds. If an investor wants to allocate capital into physical gold, he or she must buy the precious metal and store it.

An ETF can allow an investors to access the bond market without actually purchasing the debt and the commodities market without purchasing actual gold. This is because an ETF is a type of security that tracks an index, bonds, commodities, currencies, or a mix of various asset classes.

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