The IPO market is back on fire and investors are once again falling over each other trying to get a piece of the newest publicly traded companies. The recent initial public offering of Lyft (LYFT) is a perfect example of why investors really should avoid getting caught up in the hype of a big IPO. To see why all you need to do is look at the stock chart of Lyft and see how it has fallen after its amazing ‘pop’ on its first day of trading.
The stock has a high of $88.60 per share, but is currently trading below the $60 per share range and has fallen as low as $54 per share. Lyft is not the only example of this flawed IPO process. Facebook (FB), Snap (SNAP), Blue Apron (APRN), DropBox (DBX) are just a few of the other bigger name IPOs that have had lots of hype surrounding them and nice jumps on the first days of trading but soon fell out of favor with investors. With Facebook, while it may have taken some time to gain traction, the stock did come back from its post IPO fall and has performed well for investors, but the others have yet to do so.
The issue with heavily hyped IPOs is that the companies rarely live up to the hype and the stock soon falls below IPO prices as investors realize growth and actual fundamentals of these companies don’t match the pre-IPO hype.
Now, this isn’t to say that all IPOs are failures. Roku (ROKU), DocuSign, (DOCU), BJ’s Wholesale Club (BJ) are all examples of recent IPOs that are trading higher than their initial public offering price and have rewarded shareholders.
So, you may be wondering how you filter out the IPO winners and loser?
Well, that would certainly be a good question, but the answer is that it is very difficult to predict which IPOs will be winners and which will be losers. Let’s be honest; if we could accurately predict this, we would all be millionaire’s by now, which we are not; at least I am not. So, instead of rolling the dice with individual IPOs why not buy into the whole IPO system with one simple purchase of an IPO focused Exchange Traded Fund.
IPO ETFs buy recently IPO’d stocks a few days after they go public and then hold them for specified time periods. This gives you access to IPOs without having to do the research and make the decision on which ones are going to rise and fall days or weeks after going public.
The largest of the IPO ETFs is the First Trust U.S. Equity Opportunities ETF (FPX) which holds the 100 largest US firms with recent IPOs, weighted by market cap. FPX holds these companies for their first 1,000 trading days after being bought following the close of their sixth trading day. This allows the fund to miss any big drops in the days following the IPO and release big moves higher as the company works through the growing pains of its first few years of being a public company. FPX has an expense ratio of 0.59% and $1.14 billion in assets under management. The fund has been in existence since 2006 and has performed rather well over the years with an annualized 10-year return of 18.96%, not to mention the fund is up 23.4% year-to-date.
Another similar option is the Renaissance IPO ETF (IPO) which tracks a market cap weighted index of recent US-listed IPOs. The fund purchases within 90 days of a new IPO and sells after the stock has been trading for 2 years. IPO only has $40 million in assets under management and charges 0.60%, but is up 35% year-to-date and only 9% annualized over the last 5 years.
Another option is the Invesco S&P Spin-Off ETF (CSD) which invests in large- and mid-cap US stocks that have been split off from a larger company. CSD pulls from a broader index than just the S&P 500 but has a minimum size requirement of $1 billion or more. It has an expense ratio of 0.64%, $148 million in assets under management and currently, has 31 holdings with an average market cap of $22 billion. Year-to-date the fund is up 23%, while being down 0.23% over the past year and has a 10-year annualized return of 15.9%, despite its 5-year annualized return of just 4.8%.
Finally, we have an international option, the First Trust International Equity Opportunities ETF (FPXI). FPXI tracks a market-cap-weighted index of the 50 largest international IPOs during their first 1,000 trading days. Currently, the fund holds just 33 positions, charges 0.70% and only has $22 million in assets under management. However, the fund is up 15% year-to-date and is up 11.79% annualized over the last 3 years. It has 26% invested in Hong Kong-based companies, 16% in Chinese firms with 31% in financials and 16% in technology companies.
As you can see, the IPO market can be profitable if you don’t get caught up in the hype of the next big-name public company and try to cherry-pick the winners and losers. By just regularly buy into new listings and holding them for a few years these some of these ETFs have performed very well for investors, something to keep in mind before you call your broker and beg for shares of UBER.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor held positions in owned shares of Facebook and DocuSign at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
