How to Invest in IPOs via Mutual Funds and ETFs

The Alibaba (BABA) IPO is sure to be one of the largest initial public offerings in years, bringing attention to the idea of investing in initial public offerings. But how to invest in the Alibaba IPO is easier said than done.

man investing in IPO mutual funds and etfs
Source: iStockPhoto.com/Vadmary

Can the general investing public take advantage of the Alibaba IPO at all, or is it just the corporate insiders and investment bankers that profit the most?

Can the general investing public take advantage of the Alibaba IPO at all, or is it just the corporate insiders and investment bankers that profit the most?

What about ETFs or mutual funds? Can they be a good way to get exposure to the IPO market?

One of the many advantages of ETFs and mutual funds is that they are accessible to everyday investors and have great flexibility. At a reasonable entry price, mutual funds and ETF investments can provide exposure to the broad market as a whole or they can specialize in sectors.

Those sectors include technology or niche market segments such as social media, meaning there’s potential to invest in the Alibaba IPO via funds.

Of course, there are dozens of mutual funds, most of which have an “aggressive growth” objective, that can invest in IPOs … but only as a small part of a larger portfolio of established growth stock companies.There are really only two ETFs and one actively-managed mutual fund that focus heavily on IPOs like Alibaba and others.

Let’s take a look at each of the three funds to see if investing in IPOs via mutual funds or ETFs is a smart bet for your portfolio, either as how to invest in the Alibaba IPO or as a way to play other high-growth opportunities.

Then, let’s talk about how to invest in IPOs:

How to Invest in IPOs: First Trust US IPO Index (FPX)

First Trust US IPO Index (FPX) has an eight-year  track record that looks impressive. For five consecutive years, from 2009 through 2013, FPX outperformed the S&P 500 Index. As of mid-year, June 30, 2014, the fund was just behind the index with 6.5% return compared to 7.1% for the S&P 500.

First Trust US IPO Index (FPX)The investment objective of the fund is to replicate as closely as possible, after fees and expenses, the price of IPOX-100 U.S. Index.

In the words of First Trust, “the U.S. IPOX-100 Index has historically captured around 85% of total market capitalization created through U.S. IPO activity during the past four years.”

Top holdings  include IPOs launched in recent years such as Facebook (FB) and Tesla (TSLA). Tech names are popular, but other more established names that debuted in the past few years, such as General Motors (GM), are also present.

So is FPDX a good option when it comes to how to invest in IPOs? My personal take on FPX is that it can be a good way to get exposure to recent IPOs but it achieves roughly the same results as an aggressive growth stock ETF. For example, Powershares QQQ (QQQ) has similar performance and risk measures as FPX.

How to Invest in IPOs: Renaissance IPO ETF (IPO)

How to Invest in IPOs: Renaissance IPO ETF (IPO)Renaissance IPO ETF (IPO) was established in October of 2013, which makes it younger in terms of market age than some its top holdings, which include Twitter (TWTR) and Zoetis Inc (ZTS).

According to Renaissance Capital, here’s a brief summary of how their IPO ETF works: “New companies are added to the Renaissance IPO ETF on a fast entry basis on the fifth day of trading, or upon quarterly review, and are removed after two years when the IPOs become seasoned stocks.”

Their marketing tagline suggest that shareholders in the ETF can “can get the most significant newly public U.S. companies (IPOs) in a portfolio, prior to their inclusion in core U.S. equity indexes.”

My take on the Renaissance IPO ETF is that it’s history is too brief to get a full grasp on its potential benefits. The idea of buying shares of IPOs on the “fifth trading day” is somewhat appealing, considering that big IPOs can soar in price in the first few hours or days of trading, then fall dramatically for another few days.

I would still take a wait-and-see perspective on this fund, however, given its relatively short life.

How to Invest in IPOs: Global IPO Plus Aftermarket (IPOSX)

Global IPO Plus Aftermarket (IPOSX) is another production of Renaissance Capital and is managed by the same team. The fund’s been around since 1997, which makes it the oldest fund of its kind. And it can, at the management team’s discretion, buy IPOs “on the offering,”  its positive attributes stop there.

How to Invest in IPOs: Global IPO Plus Aftermarket (IPOSX)
Source: ©iStock.com/mindscanner

Compared to its mid-cap growth category peers, the 15-year performance rank for IPOSX is 100th percentile, which, if you’re not a statistician, puts the fund at the very bottom in returns.

If you want a mid-cap stock fund you would do better to simply buy Vanguard Mid-Cap Index (VIMSX).

My Overall Take on How to Invest in IPOs

The likely reason that there are only a few funds that invest in IPOs is that there really isn’t a good way to obtain with ETFs or mutual funds what most investors seek with IPOs, which is to somehow be among the first in line to buy shares of the hottest new companies coming into the public realm of investing and make big profits.

Return now to the opening questions of this article: Can the general investing public take advantage of such offerings or is it just the corporate insiders and investment bankers that profit the most? What about ETFs or mutual funds? Can they be a good way to get exposure to the IPO market?

Yes, corporate insiders and bankers get the biggest initial gains. No, the time has not yet arrived where the general investing public can take advantage of investing in IPOs with ETFs or mutual funds.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/07/how-to-invest-in-ipos-alibaba-ipo/.

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