Everybody loves the romance of an IPO — a company going public with the potential to deliver huge profits to those investors on the ground floor. But the reality of initial public offerings are very different than the storybook version some traders believe. Trying to research these tiny upstarts can give investors fits, and sometimes even a stock that looks good on paper can fall flat on its face right out of the gate.

Take 2009 IPO NIVS IntelliMedia Technology (NIV). The stock was offered at $3.50 as the market was tanking last March, and gapped up to a peak of $4.50 in a few days as the market surged off its historic lows. Then it sunk to a mere $2.30 in May and hasn’t traded above $4 a share ever since, even after a 25% surge in stock prices yesterday!

So how can you grab some of the romance of IPOs without the heartache of failures like NIV? One way is to invest in an IPO mutual fund or ETF that casts a wider net. This adds some diversification to your holdings but still allows the explosiveness of newly-minted stocks.

Take the First Trust IPOX 100 Index (FPX) that tracks an index of the 100 top IPOs in the United States. The fund measures performance of these IPOs by market cap, and rebalances quarterly.

Now, don’t confuse this with actually being part of the initial public offering. Those golden tickets are saved for company insiders, or the sister of a brother of a cousin of an insider. The First Trust IPOX 100 Index adds in these newly-minted stocks on their seventh day of trading. The crafty folks at IPOX say this is designed to capitalize on a long-term “buy and hold” perspective, and to weed out some of the volatility caused in the early days of trading. On their 1,000th day on the market — that’s a little less than three years – these IPOs are too stale to stick around and are moved out of the ETF as components.

The IPO Plus Aftermarket (IPOSX) is another flavor of this, though it is a mutual fund and not an ETF. According to Renaissance Capital’s prospectus on this fund, IPOSX invests 80% of its assets (“under normal circumstances,” whatever that means) in the common stocks of domestic and foreign initial public offerings, IPO arbitrage and hedging, and securities issued by IPO-related entities including a parent company spinning off an IPO.

So how have the FPX ETF and the IPOSX mutual fund performed in the last year or so? Well, the First Trust IPOX 100 Index is up about 85% since the March lows, slightly better than the market. The IPO Plus fund hasn’t done as well, up about 40% since the lows.

But as the market seems to be getting more favorable for stocks and the recession is put behind us, it may be a good time for IPOs — and a good time for these two investments.

Tell us what you think here.

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