Exercise Caution in the Hot IPO Sector, Says Market Expert | ETF Trends

The Covid-19 pandemic painted a cloudy picture for initial public offerings (IPOs) to start 2020, but they’re set to finish the year strong. With key IPOs already in the works, this makes a case for a rebound in IPO-focused exchange-traded funds (ETFs), but investors need to exercise caution before diving into the space.

“One possible explanation for investors’ increased appetite for newly issued stocks is that ‘there’s so much liquidity out there,’ Tim Seymour, founder and chief investment officer of Seymour Asset Management, told CNBC’s ETF Edge,” a CNBC report said.

As far as other reasons for IPO strength, the CNBC article also credited “the Federal Reserve’s liquidity injections and low interest rate policy.” Additionally, “there’s more capital for institutions and investors to work with when it comes to buying riskier assets such as new IPOs, Seymour said.”

“If you look at a lot of the IPOs that are rushing to market, they happen to be in some of the hottest parts of … the new economy,” said Seymour. “You have these companies that are representative of the haves in the world of haves and have-nots of the Covid-19 environment.”

Of course, due diligence is always key when navigating the IPO waters. Recent history shows that not all IPOs start out a success.

“A lot of these IPOs may have done great on day one or day two, but really underperformed for the next three to nine months. Look at Moderna. Look at Uber,” Seymour said. “Uber’s underperformed the S&P by 25% since it came to market. So, investors really need to understand, if they’re investing in an ETF that gets exposure to the IPOs, how active is it and, really, what is the strategy?”

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.

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.

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