The social media giant Facebook has the investing world abuzz with its plan to finally go public. Exchange traded funds focusing on initial public offerings have been solid performers so far this year and could get a lift from the Facebook IPO, but not right away.
An IPO is an offering to the public to purchase shares of a company, usually because the business wants to raise more capital. By investing in an IPO ETF, an investor is hoping to gain exposure to the company in the initial introduction to the market. The appeal of an IPO is that an investor can be in on the ground floor of an uprising company, with potential upside growth in share price. [Facebook IPO Drives Interest in Social Media ETF]
Investors that are keen on purchasing public shares of Facebook should take a pause. Chances are that a majority of investors are way back at the end of the line, reports Melissa Block on NPR. For those investors that are hot on an IPO ETF, the stock does not enter the ETF index immediately after offering. The first-day rally that many are after may not even be included in the fund. [The IPO Party: Will the ETF Join In?]
It is also important to remember that IPOs are not a guaranteed success. Holdings can increase and decrease in value over the weeks or months after the offering. One benefit of an IPO ETF is that the diversification of several IPOs happens to balance out any volatility or weakness in a particular company should the value weaken, i.e. Pandora (NYSE: P). [IPO ETF Sidesteps Pandora Flop]
Consider that the very hot IPO’, such as Facebook, are purchased by the underwriters before the public has even gotten a chance to get in. Underwriters are the big banks such as Goldman Sachs, Morgan Stanley, etc., and the shares they purchase go to their best clients first. This includes hedge funds, large institutions and huge money managers, not the majority of individual investors. [ETFs Target Internet IPOs, Social Media]
After the opening day, when the stock goes public and begins trading, most average investors can go in and buy shares at the trading price. But the opening day “pop” is over, and that is where the money is at, before the general public has had a chance.
First Trust IPOX-100Index Fund ETF
Tisha Guerrero contributed to this article.