Will IPO ETFs Continue To Thrive In 2015?

The global IPO market enjoyed a boom in 2014, with 40% more companies going public and raising a total of $249 billion. While global issues such as turmoil in Russia and conflict in the Middle East unnerved investors for the whole of the year, they kept on clamoring for new stocks with high growth potential and in turn contributed to the huge success of the IPO industry.

As per IPO research intelligence Renaissance Capital, U.S. led the global IPO market, hitting a 14-year high thanks to the biotech issuance frenzy and Chinese e-commerce giant Alibaba Group’s (BABA) massive offering. A record 275 companies completed their IPOs in 2014, raising $85.3 billion. The total number of IPOs in 2013 and 2012 was 222 and 128, respectively (read: Alibaba Investors Cheer Revenue Growth, ETFs to Benefit).

A Fast Recap of 2014 IPOs

The health care sector had a large number of IPOs accounting for 37% of the total deal volume largely driven by the biotech space. Technology and financials make up for 20% and 13% deal volumes, respectively. In terms of proceeds raised, technology companies topped the list with $32.3 billion, closely followed by financial companies with $18.6 billion.

In fact, 11 IPOs raised over $1 billion, up 4 from 2013, and the highest since 2001. Alibaba was the blockbuster IPO raising $21.77 billion and representing 26% of the total proceeds. Joining Alibaba in the billion-dollar club was JD.com Inc. (JD) from the tech space raising $1.78 billion, IMS Health (IMS) from the business service sector raising $1.3 billion and seven other financial firms raising in the range of $1–$3 billion.

The two most successful IPOs were from the biotech corner of the health care space. Radius Health (RDUS) and Auspex Pharmaceuticals (ASPX) surged about 386.4% and 337.3%, respectively, since their debut on June 9 and February 5. Consumer IPOs also outperformed with camera maker GoPro (GPRO) returning 163.4% while fast casual restaurants – Zoe’s Kitchen (ZOES) and The Habit Restaurants (HABT) – gained 99% and 80%, respectively. In the technology space, IPOs from TubeMogul (TUBE), Zendesk (ZEN) and TrueCar (TRUE) also saw triple-digit gains of 222.1%, 170.8% and 154.4%, respectively.

On the other hand, IPOs in the energy, transportation, and materials sectors have lagged due to the oil price collapse. Energy firms sold off significantly with North Atlantic Drilling (NADL) and Eclipse Resources (ECR) being the 10 worst performers, losing 82.4% and 74%, respectively (read: Market Beating Sector ETFs of 2014).

On the international front, Saudi Arabia's National Commercial Bank and Australia's largest private health insurer Medibank Private fetched $6 billion and $4.9 billion, respectively, marking the second and third largest IPOs of the last year after Alibaba.

What’s Hot on Wheels for 2015?

Similar to last year, 2015 seems to be another busy year for the IPO market despite the global economic and political headwinds. This is especially true as 126 companies are currently in the pipeline of going public and seeking to raise $21.8 billion. Notably, 80% of the total IPO list is expected from the tech sector.

Some of the biggest IPO deals that could fetch over $1 billion include China’s largest smartphone vendor Xiaomi Corp., mobile car-booking company Uber Technologies, Spanish language media company Univision, and a global payment processing company, First Data.  

Further, investors also seem interested in the IPOs of a bunch of other well-known companies like fine casual burger chains Shake Shack (SHAK, pending) and Smashburger, web-domain company GoDaddy,  smartphone app Snapchat, music streaming services provider Spotify, online home rental service Airbnb, foodservice distributor Performance Food Group, file storage companies ‘DropBox’ and ‘Box’, as well as photo-sharing website Pinterest (read: 5 Must-Have ETFs for 2015).

With a large pipeline and some reputed companies likely to go public this year, 2015 could be another banner year for the IPO market since 2000. While investing in many IPOs at the same time could be difficult, investors could easily tap the IPO resurgence with the three ETFs discussed below:

First Trust US IPO Index Fund (FPX - ETF report)

This ETF provides exposure to the booming U.S. IPO market by tracking the IPOX-100 U.S. Index. Since it focuses on 100 largest and most liquid U.S. IPOs, new companies can find entry into the fund’s holding after trading for a minimum of 100 days. Currently, two firms – Facebook (FB) and AbbVie (ABBV) – dominate the fund’s return with nearly 10% share each.  Other securities do not hold more than 3.85% of assets.

The product has a nice mix of sectors, with the top four being consumer discretionary, information technology, health care and energy. The fund has accumulated $536.9 million in AUM and sees volume of about 79,000 shares per day. It charges 60 bps in fees a year. FPX gained 11.4% in 2014.

Renaissance IPO ETF (IPO - ETF report)

This ETF follows the Renaissance IPO Index, which holds the largest and most liquid newly listed U.S. initial public offerings. Currently, the product holds 63 securities in its basket with largest allocations going to Zoetics (ZTS), Alibaba, and Twitter (TWTR) with a combined 27.6% of assets. New companies seek inclusion on a ‘fast entry basis’ on the fifth day of trading.

From a sector look, technology stocks make up for one-third share while financials, health care, and consumer services round off the next three spots with double-digit exposure. The product has amassed $27.5 million in its asset base and sees light volume of under 18,000 shares. It charges 60 bps in annual fees and has risen nearly 5% last year.

Renaissance International IPO ETF (IPOS - ETF report)

This fund provides international exposure to the IPO market by tracking the Renaissance International IPO Index and adds new companies on the fifth day of trading. It currently holds 102 stocks with each holding less than 4.5%, suggesting diversification benefits. Sector wise, the product is skewed toward financials at 38%, followed by industrials (21.1%) and consumer services (12.3%).

In terms of country exposure, Europe takes the top spot at 44% while Asia Pacific, North America, and Asia receive double-digit allocation in the basket. The fund has accumulated $2 million and has delivered almost returns since its debut three months ago. It trades in paltry volume of under 2,000 shares while expense ratio came in at 0.80% (read: Invest in Global IPOs with This New ETF).

Bottom Line

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

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