ETFs To Play The IPO Boom

Video Length: 00:09:30

The IPO market is booming this year. Investors’ voracious appetite for fast-growing companies and abundant liquidity are fueling this boom. Most of the IPOs this year are in the hottest areas of the market that benefit from coronavirus driven trends. Excellent performance by some of the newly public companies has also resulted in increased investor interest in IPOs.

The biggest tech IPO of the year--Snowflake --had some high-profile backers including Warren Buffett’s Berkshire Hathaway that had invested $250 million in the company and bought shares at the $120 IPO price.

Two of the most hotly anticipated listings--data firm Palantir and software company Asana--will make their public debut today via direct listings and will not raise any new capital. The “blank check” acquisition companies also known as special purpose acquisition companies, or SPACs, have also been very popular this year.

IPO ETFs provide exposure to newly public companies before they join other core US equity indexes. Most broad-market indexes include newly public companies only after a ‘seasoning’ period—i.e. after they have been trading for some time. For example, Google was included in the S&P 500 index about two years after its debut.

The Renaissance IPO ETF (IPO - Free Report) holds the largest, most liquid newly-listed U.S.IPOs. Large IPOs are added on a fast entry basis and the rest are added during scheduled quarterly reviews. Companies that have been public for two years are removed at the next quarterly review.

The ETF is up almost 66% this year. Zoom Video (ZM - Free Report), Peloton (PTON - Free Report), Moderna (MRNA - Free Report), and Nio (NIO - Free Report) are among its holdings.

The First Trust US Equity Opportunities ETF (FPX - Free Report) holds 100 largest, and most liquid U.S. IPOs. Eligible stocks are purchased after the close on the 6th trading day and held for about four years. The ETF has returned about 20% this year.

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