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ETF investing strategy: Initial public offerings (IPOs) are debuting in 2014 at an incredible pace.
IPO research firm Renaissance Capital shows that through mid-April, some 64 IPOs had debuted in in the United States this year. That figure is more than double the number that launched in last year's first quarter.
As of April 14, IPOs had raised a total of $10.6 billion, a nearly 40% increase from the similar period in 2013, Renaissance Capital reported. The average IPO was up 24.6% from its offer price, more than 10 times the S&P's return in the period.
As economic indicators such as consumer confidence and gross domestic product (GDP) continue to show improvement since 2007's depression, this trend is expected to continue.
Using exchange-traded funds (ETFs) as a tool to invest in IPOs allows investors to participate in a multitude of companies, sometimes from a variety of sectors. Additionally, if an investor's risk tolerance is low, using an ETF investing strategy to tap into IPOs could be particularly attractive because the fund does the necessary due diligence before including an IPO among its holdings.
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Here we will examine a few of the top IPO ETFs on the market to illustrate the advantages of employing this type of ETF investing strategy.
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First Trust IPOX-100 Index Fund ETF (FPX)
This ETF is structured with the strategy of replicating the price/yield of the IPOX-100 U.S. Index (the "Index"). With assets of $470 million, this fund sees a daily volume activity of around 100,000 shares and charges fees of approximately 60 basis points annually.
"Strictly speaking, it doesn't specialize in high tech," Money Morning Defense & Tech Specialist Michael A. Robinson said. "Instead, FPX is a broad play on new issues in which tech and healthcare account for nearly a third of its holdings."
Besides tech, FPX holds positions in finance, auto, retail, heavy industry, energy, and a smattering of metals covering nearly 100 stocks.
FPX gained more than 50% in 2013 and has a five-year return of 238.62%. Over the past year, it has returned more than 28% to investors, or roughly 55% more than the S&P 500 – this makes FPX a profitable part of an IPO ETF investing strategy.
Renaissance IPO ETF (IPO)
Renaissance IPO ETF was launched in October 2013 in response to investor demand for a safer, low-cost method to participate in IPOs of higher quality in their initial stages.
The fund is indexed to the Renaissance IPO Index, designed by an IPO research team from Renaissance Capital. The idea behind the Index is to give investors exposure to newly issued public offerings before their inclusion in broad-based indices. New companies are selected based upon the fund's criteria after a mere five days of trading activity.
Technology stocks comprise about a third of the fund's holdings. Additional sectors include health care, real estate, and energy.
In its short history, IPO has accumulated assets in the amount of $29.30 million and currently includes holdings for 60 companies. Renaissance is a key part of an IPO ETF investing strategy for 2014.
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