A booming market for initial public offerings has helped push the NYSE Arca-listed First Trust US Equity Opportunities ETF (FPX US) above $2 billion in assets under management.
A string of blockbuster floatations has helped drive assets in First Trust’s US IPO ETF to more than $2bn.
Launched by First Trust in 2006, the fund is up 54% over the past 12 months – its best 12-month rolling return since April 2010.
Since its inception, it is up more than 600%.
The fund is referenced to the innovative IPOX-100 US Index, an index measuring the post-debut performance of 100 of the largest and most liquid US IPOs.
The index is composed of companies recently listed by way of an IPO, corporate spin-off, or equity carve-out. Companies accede to the index at the close of the sixth trading day following their IPO and are eligible to remain in the index until the close of their 1,000th trading day.
To be included in the index, a new listing must have a market capitalization of at least $50 million (in reality most constituents have market capitalizations in excess of $1bn) and at least 15% public float.
Companies that experience abnormally large “underpricing” in their IPO are not eligible for inclusion. Underpricing is the practice of deliberately floating a company at a price below its fair market value in the stock market.
The 100 qualifying companies with the largest market capitalizations are included in the index which are then weighted by market capitalization subject to an individual security cap of 10%.
The index has historically captured exposure to over 85% of the market capitalization of US IPOs, while tilting towards mid- and large-cap offerings. Significant positions currently include Snap, Uber Technologies, Marvell Technology, Thermo Fisher Scientific, Eli Lilly and Company, Fidelity National Information Services, Dow, CrowdStrike, Spotify, and Zoom.
The fund is useful for investors who seek exposure to recent IPOs but who do not wish to assume the stock-specific risk that comes with trying to pick which IPOs will be successful. Plus, because the fund only owns recent new listings, there is very little overlap with traditional index funds, which are tied to indices that generally have a waiting period before admitting new IPOs. As a result, the fund can complement a core domestic holding by providing more complete exposure to the total equity market.
Data from IPOX Schuster, the creators of the index, show that 210 companies went public in 2020, an increase of 25% from 2019. These companies raised $76.29 billion, up 74.49% on 2019.
“Amid the increase in the number of IPOs, these strong returns underline once more the unique nature and potency of some of the deals coming to market, as IPO companies often operate in unique sectors of the economy not susceptible to overall stock market and economic sentiment, therefore providing for the opportunity of adding unique portfolio returns,” said Dr. Josef Schuster, founder and chief architect of the IPOX Schuster indices.
“We believe the focus on recent IPOs and spin-offs is an important key to the success of this unique strategy, which provides exposure to the innovation and growth of many recently issued stocks long before they have been added to traditional index funds,” added Ryan Issakainen, CFA, Senior Vice President, ETF Strategist at First Trust.
The fund has net expense ratio of 0.58%.
A UCITS version of the strategy, the First Trust US Equity Opportunities UCITS ETF, is available in Europe on the London Stock Exchange (FPX LN) and Euronext Paris (FPXU FP). It comes with a TER of 0.65%.
