When it comes to IPOs, Renaissance Capital is one of the top research firms in the space.
The company, founded in 1991, provides research for institutions and also has an excellent website called IPOHome.com. But there is also an exchange-traded fund, called Renaissance IPO ETF (IPO), which makes it easy for anyone to participate in the IPO market.
However, before taking a look at the IPO ETF, let’s first get some background on the IPO market:
IPO Basics
An IPO is when a private company issues shares on an exchange, such as NASDAQ or the NYSE. The process involves extensive federal regulations that provide for disclosures to investors, such as S-1 filings.
It’s common for an IPO to spike on the first day of trading, say by 15% to 20%. The reason is that Wall Street investment bankers try to gin up demand by providing bargains for investors. Yet most of the shares are allocated to mutual funds, hedge funds and other institutions.
For the most part, IPOs are early-stage companies from high-growth industries like biotech and technology. Because of this, there is often lots of volatility. Just look at some of the best and worst performers during the past year:
| Company | Return |
| Radius Health Inc (RDUS) | 361% |
| Cyberark Software Ltd (CYBR) | 318% |
| Signal Genetics Inc (SGNL) | -81% |
| MOL Global Inc (MOLG) | -82% |
Of course, the way to help smooth out this risk is to invest in a portfolio of IPOs. And this is where the Renaissance IPO ETF comes in. It is based on a proprietary index that has rigorous requirements.
For example, to be included, an IPO must have an initial float market cap of $100 million (this is the stock price multiplied by the number of shares on the market). There also needs to be healthy trading action, with at least 0.04% of the float traded on a daily basis.
If an IPO meets the cut, it will be included in the Renaissance IPO ETF after five trading days. This waiting period allows some of the hype to subside.
Renaissance IPO ETF
So here’s a look at the five top holdings:
| Company | Portfolio Weight |
| Alibaba (BABA) | 9.1% |
| Twitter (TWTR) | 7.4% |
| Hilton Worldwide (HLT) | 5.9% |
| Ally Financial (ALLY) | 5.3% |
| Voya Financial (VOYA) | 4.8% |
Keep in mind that an IPO will remain in the index for 2 years so long as it does not violate the index requirements.
In terms of the performance of the Renaissance IPO ETF, it is still in the early days. Consider that it was launched in October 2013. But since then, the ETF has gained a total return of 20%. Expenses for the IPO ETF run a reasonable 0.6%.
However, the Renaissance IPO index has been around for a longer period. In fact, during the past three years, it has gained a hefty 80% return — outperforming the S&P 500 by 25 percentage points — which should be fine for any IPO investor.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
