ELAN has plummeted 16% this year. As recently as 3 weeks ago, ELAN was the third-largest holding in the fund.
Uber (UBER) has dragged on the fund’s performance too. As my readers know, Uber suffered a terrible IPO. It remains the 9th-biggest holding in the Renaissance IPO ETF.
Beyond Meat (BYND) Makes Up Less Than 1% of the Fund’s Assets
Beyond Meat makes plant-based “meat.” If you’ve been reading my essays, you know its story well by now.
Beyond Meat achieved one of the most explosive IPOs in history. Individual investors first got a chance to buy it at around $53. It would rocket to $239 in about 3 months.
I know a few investors who made a killing with Beyond Meat. But it’s barely moved the needle for the Renaissance IPO ETF.
BYND is the 33rd-biggest holding in the fund. It accounts for less than 1% of its total holdings.
The Renaissance IPO ETF Takes a “Shotgun Approach” to Investing
If you’ve ever seen duck hunting, you know how a shotgun works. Instead of firing one bullet, it sprays lots of tiny metal pellets across a wide area. This boosts your chances of hitting a moving target. But it’s also imprecise.
This is how the Renaissance ETF invests in IPOs. It scatters its capital across dozens of stocks.
It doesn’t matter if a recently IPO’d business is growing, shrinking, profitable, or unprofitable. It doesn’t matter if it sells cutting-edge software or sacks of dog food.
If a company went public recently, the IPO ETF will buy its shares.
Now, the shotgun approach works well with some markets. But it’s not the best way to invest in IPOs.
Sure… even with the drawbacks I just explained, the Renaissance IPO ETF is still beating the market this year. But it’s also leaving tons of money on the table. Imagine if it had tilted its allocation toward a few big winning IPOs… or simply excluded a few of the big losers.
If you really want to make a killing in IPOs, you need to swap the shotgun for a sniper rifle. More important, adopt a sniper’s mentality.
A good sniper is extremely selective about the shots he takes. He will hide in the grass for days, waiting for the perfect shot before pulling the trigger.
The hard truth is most IPOs don’t deserve your money. But the 1 in 5 that do can make a real difference in your financial life.
So, buying the IPO ETF is fine if you just want a taste of IPO returns. But if you’re after 5 and 10 baggers, you have to act like a sniper and target the best individual IPOs.
Things to Consider Before Pulling the Trigger on an IPO
Don’t fall for hype: In recent years, the biggest IPOs have been the ones to avoid. Just look at how Uber, Spotify, and Lyft (LYFT) have performed.
Not even mighty Facebook (FB) could live up to its pre-IPO hype. Its share price plummeted 54% in the five months after its IPO, before it bottomed out and went on to hand out a 1,000% gain.
This didn’t happen because Facebook is a bad company. Facebook plunged because it went public at an absurd $104 billion valuation. It couldn’t live up to the initial hype.
Look out for insider selling: This is a huge red flag.
Insider selling is when a director, officer, or high-ranking executive sells their shares.
These people typically have big stakes in a company. They have the most to gain—or potentially lose—from the company going public.
If they’re dumping shares before an IPO, it shows they don’t have high hopes for the stock. Maybe they think the company’s overvalued. Or maybe there are serious problems that the public don’t know about yet.
In any case, I’ll steer clear of any IPO when an insider is dumping shares.
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