Buoyed by the best year for U.S. initial public offerings since the height of the late 1990s tech bubble, the First Trust US IPO Index Fund (NYSEArca: FPX), surged almost 48% last year while ranking as one of the ETF industry’s best asset gatherers on a percentage basis.
As of Jan. 16, FPX had $378.5 million in assets under management, according to First Trust data, $275.3 million of which flowed into the fund last year. The fund is off to a strong start this year with inflows of $31.6 million.
FPX hauled in $165 million in the fourth quarter alone as companies raised about $22 billion in U.S. IPOs, reports Alexis Xydias for Bloomberg.
Despite the stellar returns and asset-gathering acumen, FPX, by no fault of its own, remains arguably one of the most misunderstood ETFs on the market today. FPX tries to reflect the performance of the IPOX Global Composite Index, which is a rules based value-weighted index measuring the average performance of U.S. IPOs during the first 1,000 trading days and selects the 100 largest, best performing and most liquid IPOs. [Hot IPOs Take the Long Way Into ETFs]
Yes, FPX has been bolstered in part by an almost 10.2% allocation to Facebook (NasdaqGM: FB), but the ETF did not rush to add the stock following the 2012 IPO as did the Global X Social Media Index ETF (NasdaqGS: SOCL). FPX also recently added Twitter to its lineup, but with a weight of just 0.54%, Twitter is of little consequence to FPX’s returns.
The ETF also did not add Twitter to its lineup as rapidly as SOCL or the Renaissance IPO ETF (NYSEArca: IPO) made Twitter a part of their rosters. [Twitter Enters IPO ETF as Top-10 Holding]
In other words, the perception that FPX is levered to the number of IPOs or dollars generated from those generated from those share sales in a given year is mostly false. Taking a closer look at FPX’s holdings, index components include spinoffs – a new company created through the sale of distribution of new shares on an existing firm, companies that have gone public after recovering from bankruptcy and formerly public firms that were privatized in private equity buyouts only to be taken public again a few years later.
Look at FPX’s top-four holdings. After Facebook, it is Abbvie (NYSE: ABBV), General Motors (NYSE: GM) and Phillips (NYSE: PSX). That is two spin-offs and a former bankruptcy (GM).
Assuming that FPX needs an elevated number of IPOs every year to perform well is false. Here is why: If 2013 represented the best year for U.S. IPOs in dollar terms since 1999, that does not explain the ETF’s four-year winning streak. In every year from 2009 through 2013, FPX crushed the S&P 500, including beating the broader market index by 1,800 basis points in 2009.
It is probably safe to say that in 2009, with the financial crisis still fresh on executives’ minds, the number of IPOs was not on par with that of 1999 or 2013. Yet somehow FPX managed to gain 44.6%.
First Trust US IPO Index Fund
Tom Lydon’s clients own shares of Facebook.