Getting in on an initial public offering (IPO) can be a hit-or-miss proposition — how do you know what’s going to take off and stay taken off vs. what’s going to peter out after an initial rush of excitement? What’s the next Google and what’s the next Krispy Kreme? Joseph Schuster, the creator of the index that U.S. IPOX 100 Index Fund (FPX) exchange traded fund (ETF) tracks, believes he has identified a solution to the problem.

This ETF tracks an index of 100 top IPOs in the U.S., measuring the performance of them by their market cap and rebalancing quarterly. They’re added into the index on their seventh day of trading in order, Schuster says, to capitalize on a long-term "buy and hold" perspective. On their 1,000th day, it’s time to move on and the once hot new things are bumped out of the index in favor of a new IPO.

"Only a few IPOs are really interesting from an investor’s perspective. Ninety percent of them turn out to really be dogs, underperformers. We provide a stable solution to the problem," Schuster says.

The IPOX 100, launched in April 2006, is the first offering to track U.S. IPOs, but there’s a whole line of IPO indexes that IPOX-Schuster offers that target IPOs around the world. Later in 2006, Dow Jones launched the Dow Jones STOXX IPO indexes in the European market. They track the performance of European IPOs over three time periods: 3 months, 12 months and 60 months. A key difference between STOXX and IPOX is that STOXX includes IPOs on the day after their initial offering.

While IPOX has more exposure in large-cap IPOs, Schuster believes IPOs ultimately should be seen as a separate asset class because their returns and risks are different than that of the average, everyday stock. "We think the industry makes a mistake in not classifying them separately, and that’s what IPOX is all about."

Tags: IPOs