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Misnomers Still Surround IPO ETFs


The First Trust US IPO Index Fund (FPX) and the Renaissance IPO ETF (IPO) , the two largest ETFs dedicated to holding initial public offerings, remain misunderstood.

Previous and still existing misconceptions about FPX, the older of the two ETFs, and IPO, include the rapidity with which new issues are added to these ETFs and just how pure the IPOs are in each ETF. The latter issue is more specific to FPX, which holds an array of spin-offs and companies that once public, then privatized in private equity deals only to go public again. [IPO ETFs Still Misunderstood]

Another misconception about these ETFs has recently been receiving attention. That being that a cooling IPO market is hazardous to the health of these funds.

While it is true that at least seven planned IPOs were delayed last month, FPX managed a May gain of 1% while IPO lost just half a percent. Moreover, 2014 is not even half over, but 117 IPOs have come to market as of June 8 th , a 52% jump from the same period a year earlier, according to Renaissance Capital data.

Yet, FPX and IPO, though positive year-to-date, are both lagging the S&P 500. That is yet another sign the ETFs’ underlying holdings, not the vibrancy or lack thereof in the IPO market, determine the course for FPX and IPO.

Another sign that it is not IPO market activity or sentiment that drives the price action in these ETFs is the following factoid. From the start of March through the end of April, FPX and IPO lost an average of 6.25%, but with 27 and 30 new issues coming to market respectively, April and March stand as the two largest IPO months this year, according to Renaissance data.

Other misconceptions surrounding what moves IPO ETFs include interest rates and the spate of impressive IPOs out of China.

Regarding interest rates, Treasury yields soared last year, but FPX still managed to gain almost 48%. After debuting in October 2013, IPO gained 7.6% during a time when many market observers were forecasting 3% 10-year Treasury yields.

And yes, some of the recent Chinese Internet IPOs have been successful. Look at JD.com (JD), shares of which are up 27.2% in three weeks of trading. However, FPX does not hold that stock and IPO allocates less than 1.7% of its weight to JD.com, hardly enough to move the ETF’s needle one way or the other. [IPO ETF to Add JD.Com]

Sure, IPO is up 3.6% since JD.com came to market, but that is more the result of Zoetis (ZTS), Facebook (FB) and Workday (WDAY) posting an average gain of 4.1% since the day of JD.com’s IPO. Those are IPO’s three largest holdings, combining for almost 23% of the ETF’s weight.

Renaissance IPO ETF