FPX First Trust US Equity Opportunities ETF

With companies like Potbelly’s (PBPB) surging out of the gate, investor interest in Initial Public Offerings (IPOs) is on the rise. And with Twitter expected to make its debut on the markets before the end of the year, the focus on IPOs is reaching a frenzy.

Many IPOs have been solid performers over the long-term too, as investors clamor for new stocks with high growth potential. Companies in the social media space like Facebook (FB) have arguably been the best examples of this trend, though restaurants (like Potbelly’s or even Noodles and Company) have been extremely strong performers too (see all the Total Market ETFs here).

Thanks to this surge, along with a vast supply of choices, many investors are looking to allocate more to companies that have just had their IPO. While buying up these newly trading securities is certainly one way to do it, investors may want to consider a new ETF as a way to get basket exposure to this space, the Renaissance IPO ETF (IPO).

IPO in Focus

This new ETF follows the Renaissance IPO Index, which looks to hold the largest and most liquid newly-listed U.S. initial public offerings, while charging investors 60 basis points a year for the exposure. New companies look to be included on a ‘fast entry basis’ on the fifth day of trading, while companies will be removed from the index once they have been trading for two years.

The current portfolio is focused on large cap stocks, with that cap level making up nearly two-thirds of the total. Mid caps make up pretty much the entire rest of the portfolio, with small caps accounting for around 2% of assets (read 5 ETF Winners this Earnings Season).

From a sector look, there is a tilt towards technology stocks (24.6%), while financials (18.4%), and then two consumer industries (services with 16.6% and goods with 15.2%) round out the top four. So, there is definitely a bit of concentration risk in terms of sectors, as several segments—like utilities (0%) and materials (0.4%)—receive paltry allocations in the ETF.

Top holdings include the social media giant FB with roughly 10.9% of the portfolio, followed by Zoetis (ZTS) at 10.1%, and then Delphi Automotive (DLPH) at 9.8%. In total, the ETF holds about 50 stocks in its basket, with a clear bias towards some of the big names in the fund.  

 “The launch of the Renaissance IPO ETF, is a direct response to increased investor demand for systematic exposure to newly listed IPOs in a low-cost tax-efficient exchange-traded structure,” said Kathleen Smith, Chairman of Renaissance Capital in a press release. “When added to core U.S. equity holdings, a portfolio of unseasoned publicly traded equities provides investors with more comprehensive exposure to the full set of U.S. public equities.

How does it fit in a portfolio?

This ETF could be appropriate for those seeking diversified exposure to IPOs in exchange traded form. Recently public companies have generally outperformed over the past few years, so this could be a way to get broad exposure to the markets with a potential for some solid outperformance (See Profit from the Booming IPO Market with this ETF).

The fund might not be the best choice for those who are looking for a broad, diversified approach to investing as this product could face some concentration issues both from a sector as well as an individual security perspective. Additionally, this portfolio could skew towards growth stocks, so it might not be a great pick for value or low beta investors.

Competition and Bottom Line

Investors should note that there is already a pretty entrenched IPO ETF on the market, the First Trust IPOX-100 ETF (FPX). This product has been around since 2006 and although it has assets of just under $190 million, has been a solid—and strong performing-- way to play the IPO market in ETF form.

FPX has added over 42% in the past 52 weeks, easily trouncing the return from the S&P 500 in the same time frame, as the benchmark has added just 16.6% in comparison. Longer term performance figures are also favorable for the IPO ETF, with the two year return coming in just under 78%, and the five year return for FPX hitting 165% (See 3 Niche ETFs Crushing the Market).

The ETF does hold about 100 stocks in its basket, with the same top holding of FB. The cost is also the same as the Renaissance Capital fund, while it also has big weightings in technology and consumer stocks.

However, FPX does include spin-offs in its portfolio and stocks can remain in the index for the first 1,000 trading days after they make their initial debut. With these differences, FPX has a much wider portfolio than its new cousin in the space, while it also will hold securities for a bit longer as well.

Thanks to these differences, the new IPO ETF could find a decent niche in the space, especially if it able to generate some outperformance over FPX. Though, investors should remember that FPX has attracted a respectable but not huge asset following, so it remains to be seen if the space can support more than one IPO ETF at this time.

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DELPHI AUTO PLC (DLPH): Free Stock Analysis Report
 
FACEBOOK INC-A (FB): Free Stock Analysis Report
 
FT-IPOX 100 (FPX): ETF Research Reports
 
POTBELLY CORP (PBPB): Get Free Report
 
ZOETIS INC (ZTS): Free Stock Analysis Report
 
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