Coronavirus and Market Volatility is Stalling the IPO Market

It’s not just groceries running out of consumable goods like toilet paper that are feeling the pangs of the coronavirus outbreak, but initial public offerings (IPOs) are also being negatively impacted. With U.S. President Donald Trump declaring the coronavirus outbreak a national emergency, it’s put anticipated IPOs like Airbnb on hold.

With restricted travel and other logistic issues, it essentially puts a roadblock into getting IPOs done.

“Once the market, the overall stock market, goes through that kind of volatility, IPOs have a hard time getting done,” said Kathleen Smith, principal at Renaissance Capital.

In addition, as the capital markets get doused with a heavy dose of volatility, it’s affecting the pricing of IPOs. As stock prices fall, it essentially discounts the value of IPOs who are looking to enter.

“Then you’re going to have to take a very big discount because instead of volatility being 13% to 15%, it’s now 30% to 60%,” Smith added. “It becomes a very bad price in order to attract investors, so IPOs don’t get done.”

If the economy does slip into a recession, this also makes investors hesitant to jump into companies with no track record in the markets.

“Investors have been cautious about it being at the end of a long trend, so they’re more worried about unprofitable companies than ever before because we know that unprofitable companies don’t survive periods like this very well,” said Smith.

ETF Positioning for Future IPO Strength

Investors can get broad exposure to IPOs via the Renaissance IPO ETF (NYSEArca: IPO). IPO seeks to replicate the price and yield performance of the Renaissance IPO Index, which is a portfolio of companies that have recently completed an initial public offering (“IPO”) and are listed on a U.S. exchange.

IPO Chart

IPO data by YCharts

Another fund worth looking at is the First Trust US Equity Opportunities ETF (NYSEArca: FPX). FPX seeks investment results that correspond generally to the price and yield of an equity index called the IPOX®-100 U.S. Index, which seeks to measure the performance of the equity securities of the 100 largest and typically most liquid IPOs, including spin-offs and equity carve-outs of U.S. companies.

For investors seeking IPO opportunities around the globe, the Renaissance International IPO ETF (NYSEArca: IPOS)  adds an international spin to the IPO market. IPOS tracks the rules-based Renaissance International IPO Index, which adds sizeable new companies on a fast-entry basis with the rest upon scheduled quarterly reviews. Current IPOS holdings include SoftBank Corp, Xiaomi and China Tower Corp.

For more market trends, visit ETF Trends.