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Playing The Rising IPO Tide With ETFs

Matthew D. MCCall

 

Three months into the year and stocks have had their best first quarter in over a decade. That same bullish tone is carrying over into initial public offerings, and investors looking for play on IPOs have two solid choices in the world of ETFs.

Matthew D. McCall

And it’s not just about Facebook.

A total of 20 companies went public on U.S. exchanges during the first quarter, the highest number since the beginning of 2000. The amount raised was $1.63 billion, the highest total for a first quarter in five years.

If the final week of the first quarter is any indication of where things are headed, it could be a solid three months of IPOs. A total of $1.4 billion was raised globally as the quarter drew to a close, marking the best week since December 2010 for the global IPO market.

Facebook’s IPO coming up next month is likely to raise at least $5 billion, but, as I said, Facebook isn’t the only IPO in town.

More Than Facebook

A number of social media companies went public in the last year, and many of the names can be found in one niche ETF, the Global X Social Media ETF (NYSEArca:SOCL - News).

The top holding of SOCL is the professional online network LinkedIn (NYSE:LNKD - News), making up 12 percent of the allocation.

After going public in May 2011, the stock fell by 50 percent, but a 62 percent rally during the first quarter has the stock back near a seven-month high.

Other recent IPOs with a social media tie-in include Zynga (NasdaqGS:ZNGA - News), Groupon (NasdaqGS:GRPN - News), Yelp (NYSE:YELP - News), Pandora Media (NYSE:P) and Angie’s List (NasdaqGS:ANGI - News).

There are a total of 29 stocks that make up SOCL, with China accounting for 35 percent, the U.S. 26 percent and Japan 25 percent.

Investors pay an annual expense ratio of 0.65 percent for an ETF whose price is up 17.5 percent in 2012, easily outpacing the return of 12 percent for the S'P 500.

IPO ETF

Investors who prefer exposure to the entire IPO market as well as a small hint of social media should consider the First Trust US IPO ETF (NYSEArca:FPX - News).

The 100-stock ETF has an expense ratio of 0.60 percent, and is composed of companies in a wide range of industries that have gone public in the last couple of years.

The ETF is heavily weighted in three large-cap stocks:Visa (NYSE:V), Philip Morris International (NYSE:PM - News) and General Motors (NYSE:GM - News).

The exposure to social media stocks remained low at the end of the quarter, but I suspect some of the recent offerings will be added in the coming quarters. Year-to-date, the ETF is up 20.4 percent and is a few pennies off the best close ever.

 

 

Social Media Vs. IPOs

Because the social media revolution is so new, the majority of relevant players in the space either had an IPO recently or are in the planning stages to go public.

Therefore, investors gain exposure to the IPO sector by investing in new social media offerings. The one problem with that approach is that investments are extremely concentrated, which raises the risk potential.

During the past three months, a handful of technology firms that have exposure to the booming cloud-computing sector went public.

An investor who concentrates solely on social media would have missed out on other investment opportunities outside of that niche sector.

My suggestion is to take the money allotted for investing in social media IPOs and split it 50/50 between SOCL and FPX.

There’s very little overlap between the two IPOs, resulting in increased diversification, and investors are losing little upside by investing in two ETFs versus just one.

Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a New York-based wealth management firm specializing in investment strategies using ETFs.

 

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