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The IPO market in 2014 has been crowded, and IPO ETFs are among the best way for investors to get in on the action.
So far, 35 companies have hosted initial public offerings through the first three weeks of February. That's up 75% from the same period in 2013.
In total, 51 companies have filed for IPOs in 2014. That's an increase of 143% compared to the first two months of 2013.
And there have been some big gains for investors who have gotten in on winning IPOs early.
According to research from Renaissance Capital, 19 healthcare companies have gone public in 2014, and they've averaged first-day returns of 21%. The average total return for those companies so far is 41%.
And that's only one-fifth as much as the biggest gainers…
Dicerna Pharmaceuticals Inc. (Nasdaq: DRNA) on Jan. 29 captured a first-day return of nearly 207%.
But for every IPO that goes gangbusters, there are IPOs like Eagle Pharmaceuticals Inc. (Nasdaq: EGRX), which dropped nearly 15% on Feb. 11, its first day of trading.
Predicting which companies will hit the ground running and which companies will just hit the ground can be difficult, and it isn't the only challenge for retail investors in the IPO market.
Investing in IPOs: An Insider's Game
As Money Morning's Defense & Tech Specialist Michael Robinson has pointed out, the IPO market can be extremely difficult to break into for common investors, unfortunately.
"As I often tell people, because Wall Street tends to reserve the hottest issues for its 'best' customers – folks I often describe as the 'ultimate insiders' of the U.S. financial markets – IPO deals can be tough for retail investors to get into," Robinson said. "And even if you do manage to get a few shares, there are still difficult decisions to make – such as how long you should hold on, or under what circumstances you should sell."
That leaves investors jumping into an IPO the moment it goes public. The problem is, when a stock opens up 100%, that's where the investor is buying in. When it pares gains and finishes the day up 50%, the investor has just lost 50% of their original investment.
And those "ultimate insiders" are left celebrating their 50% gains.
Investing in IPOs doesn't always have to be risky, and the gains aren't reserved just for the "ultimate insiders."
Here are two ways any investor can play the IPO market, with IPO ETFs.
Two IPO ETFs for Trading the IPO Market
The First Trust IPOX-100 Index Fund (NYSE: FPX) generally invests in mid-cap firms with an average market cap value of around $3.3 billion. Rather than invest in micro-caps and other flashy IPOs, FPX managers only invest in an IPO after thoroughly researching the company's financials.
FPX, created in 2006, aims to avoid the early share-price rise and fall that can trap some investors.