ETF Trends CEO Tom Lydon discussed the Renaissance IPO ETF (IPO) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
The Renaissance IPO ETF adds positions of the most significant U.S. listed companies after they go public. They are added on a fast entry basis on the stock’s fifth day of trading or quarterly review. Positions are then removed after two years of trading.
Despite the coronavirus throwing a wrench in the global economy, business has resumed with more start-up companies offering their initial public offerings. The IPO fund has benefited from this renewed IPO activity. IPO is +23.2% 3-months, +59% year-to-date – one of the best performing non-leveraged ETFs of 2020.
What Happened?
IPO activity plunged over March after the fallout from the coronavirus sent stock prices reeling and pushed several companies to postpone or terminate plans to go public. However, with markets rallying, many companies have reassessed their IPO plans, which may revive the competitiveness for listings among the major exchanges.
So, why look to the IPO market specifically? With an average of $135 billion raised annually, the global IPO market is sizable and sustainable. Even during fragile market periods, such as the 2008 financial crisis, the IPO window has historically reopened after several months. The market is seeing something similar in the post-coronavirus pandemic environment as well.
Newly public companies represent an economically significant segment of the equity markets. IPO exposure complements a core equity portfolio. Newly public companies are typically included in broad equity market indices on a delayed basis until they become seasoned in trading markets. For example, Google took 591 days to enter S&P 500, 41 days to enter Russell 3000. Visa took 638 days to enter S&P 500, 102 days to enter Russell 3000
Using a portfolio of unseasoned, newly public companies can help diversify their core equity portfolios. It will limit risk with broad exposure to a new economy. Still, not all IPOs are created equal. The IPO ETF tracks and qualify all upcoming IPOs for inclusion in their formulated investment strategies to provide intelligent exposure to the most important new companies.
Recent IPO Success Story
Just because we are still amid a pandemic does not mean new successful IPOs can’t come out. Cloud data warehousing company Snowflake is the talk of the IPO town as of late with the company offering its shares to the public for the first time. Snowflake priced its initial public offering at $120 a share — well above the expected range of $100 to $110. That price range was revised upward from the original expectation of $75 to $85 a share earlier this month. But demand was so strong that shares finally wound up opening at $245 a share and quickly climbed above $300, for a 150% gain.
IPO seeks to replicate the price and yield performance of the Renaissance IPO Index. It has a portfolio of companies that have recently completed an initial public offering (“IPO”) and are listed on a U.S. exchange. The Renaissance IPO Index reflects approximately the top 80% of newly public companies based on full market capitalization, is weighted by free-float capitalization, and imposes a 10% cap on large constituents.
Listen to the full podcast episode on the IPO ETF:
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