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U.S. IPO Market Stages Solid Comeback: ETFs to Bet On

Wall Street finished in the green reversing its five-day negative trend on Thursday following news that United States and China have ramped up their efforts to resolve lingering trade disputes
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After two lackluster years, the U.S. IPO market has made an impressive comeback this year, with companies raising capital at a pace seen in the past two decades.

120 companies have completed their IPOs and raised $35.2 billion on U.S. exchanges in the first six months of the year. This marks the highest volume since 2014 and the fourth-busiest year-to-date period since 1995, according to Dealogic. These IPOs have delivered an average gain of 22% (read: Best & Worst Zones of 1H 2018 and Their ETFs).

In fact, the second quarter was the busiest since 2015 with 60 companies that went public raising nearly $13.1 billion. This marks the most-active quarter in three years as per IPO research intelligence Renaissance Capital. The number is well above 44 IPOs in the first quarter but the offering was well below $15.6 billion.  

In terms of deals, healthcare companies, especially biotechs, topped the list with 25 deals worth $2.5 billion, closely followed by technology companies with 18 deals worth $4.6 billion. Healthcare accounts for more than 40% of IPOs while tech makes up for 30%. The financial sector was in the third position, representing 10% of IPOs with six deals valued at $0.2 billion.

The largest offering in terms of proceeds was AXA Equitable Holdings EQH that raised $2.7 billion. GreenSky GSKY and BJ’s Wholesale Club BJ round off the next two, raking in $874 million and $638 million, respectively.   

Most of the companies that went public last quarter have outperformed the broader markets and generated 29% returns. The gains came on the back of improving economic fundamentals and consumer sentiment that increased the appeal for new stocks with high growth potential despite trade war fears. Technology dominates the returns with seven of the 10 best-performing IPOs belonging to this sector (read: 4 Sector ETFs That Beat the Market in 1H).

Among these, Chinese streaming company HUYA HUYA skyrocketed 172.3% since its debut on May 10, IT service provider CLPS Incorporation CLPS climbed 155.8% since its debut on May 23, laser maker nLIGHT Inc. LASR surged nearly 108% since Apr 25 and cloud software Zuora Inc. ZUO gained 102.4% since Apr 11. Goosehead Insurance GSHD from the financial sector and Inspire Medical Systems INSP from the healthcare sector popped up 160.5% and 126.1%, respectively, since they went public.

What’s Hot on Wheels?

The solid IPO trends are likely to continue as a large number of companies that had already filed in the first half this year are ready to come up with their IPOs in the second half. This is especially true as 65 companies are currently in the pipeline of going public and seeking to raise a combined $11 billion. The biggest upcoming IPO deal will come from TPG-backed commercial real estate services firm Cushman & Wakefield, which could fetch around $500 million (see: all the Total U.S. Market ETFs here).

The IPO bunch of other well-known companies include Chinese car marketplace Cango (CANG), Chinese music streaming company Tencent Music Entertainment Group, wealth management behemoth Focus Financial Partners (FOCS), a maker of electricity-generating fuel cells Bloom Energy (BE), a biotech firm Rubius Therapeutics (RUBY), oilfield services and equipment provider AFG Holdings (AFGL), franc sand solution provider Vista Proppants and Logistics (VPRL), Immunotherapy biotech Replimune Group (REPL) and Canadian cannabis company Tilray (TLRY).

How to Tap?

With a large pipeline and some reputable companies likely to go public in the second half, 2018 is on track for 160-200 IPOs raising $50 billion or more. While investing in many IPOs at the same time could be difficult, investors could easily tap the IPO resurgence with the two domestic-focused ETFs discussed below:

Renaissance IPO ETF IPO

This fund provides exposure to the largest and most-liquid newly listed companies by tracking the Renaissance IPO Index. New companies seek inclusion on a fast entry basis on the fifth day of trading. The fund currently holds 47 stocks in its basket, with each accounting for less than 6.5% exposure. Technology is the top sector accounting for 36% share while industrials, real estate and financials round off the next three with double-digit allocations each. The fund has amassed $19.3 million in its asset base while it trades in a light volume of less than 5,000 shares, probably implying additional cost beyond the expense ratio of 0.60%. The product is up 6.3% in the year-to-date timeframe.

First Trust US Equity Opportunities ETF FPX

This ETF focuses on the largest, best-performing and most-liquid U.S. IPOs and follows the IPOX-100 U.S. Index. New companies can find entry into the fund’s holding after trading for a minimum of 100 days. In total, the fund holds 100 securities in its basket with the largest allocation going to the top firm, PayPal Holdings PYPL, with 8.4% share. Other securities hold no more than 5.74% of the assets. The product has a nice mix of sectors, with the top four being information technology, health care, consumer discretionary and consumer staples. The fund has accumulated $1.2 billion in AUM and sees volume of about 66,000 shares per day. It charges 59 bps in fees a year and has gained 5.3% so far this year (read: eBay vs. PayPal ETFs: The Story After Q1 Earnings).

Bottom Line

Considering the most anticipated offerings of this year, investors seeking to take advantage of new growth stocks should definitely bank on these two ETFs. The huge success of the new listings and a prospering IPO industry would further drive the funds.

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PayPal Holdings, Inc. (PYPL) : Free Stock Analysis Report
RENAIS-IPO ETF (IPO): ETF Research Reports
FT-IPOX 100 (FPX): ETF Research Reports
GOOSEHEAD INSUR (GSHD) : Free Stock Analysis Report
Zuora, Inc. (ZUO) : Free Stock Analysis Report
GreenSky, Inc. (GSKY) : Free Stock Analysis Report
NLIGHT INC (LASR) : Free Stock Analysis Report
Inspire Medical Systems, Inc. (INSP) : Free Stock Analysis Report
AXA Equitable Holdings, Inc. (EQH) : Free Stock Analysis Report
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