It has certainly been rough going for InvestorPlace.com’s annual exchange-traded funds contest (as should be no surprise, none of the picks have positive returns). As for my pick — Renaissance IPO ETF (NYSEARCA:IPO) — the year-to-date loss was a horrible 31% earlier in the week. But the mega rally has certainly made a big difference.
Consider that the YTD performance is much more palatable, a 17% loss (for the contest, it’s ranked No. 5). It has actually done better than the S&P 500, which is off by 23%.
The IPO ETF is based on the Renaissance IPO Index, which includes 50 companies. The firm conducts quarterly reviews to determine which holdings are included or removed. Keep in mind that an initial public offering — IPO — is when a company offers a large amount of shares to the public (say 10% to 20%).
So why has the IPO ETF done relatively well — at least compared to the main indexes?
IPO Can Still Be One of the Best ETFs
Well, the fund has exposure to some areas of the economy that are likely to see secular growth. One of the categories is cloud-based software to allow for remote working. DocuSign (NASDAQ:DOCU), for example, makes it easier for business to create contracts via the cloud. The YTD return is close to 10%.
Then there is Slack Technologies (NYSE:WORK), whose shares are up 15%. The company operates one of the largest — and fastest — online collaboration platforms.
But of course, the big winner for the remote-working megatrend has been Zoom Video (NASDAQ:ZM). The demand for its video-conference software has been staggering. And the stock price has doubled so far this year, hitting a market capitalization of $39 billion.
What’s more, the IPO ETF has exposure to emerging biotech companies, which have shown some reliance this year. Just look at the fund’s position in Moderna (NASDAQ:MRNA). The company, which leverages a patient’s RNA, says that it might have a COVID-19 vaccine by the fall.
The IPO Market
For the most part, the IPO market is likely to see little activity. The extreme volatility makes it incredibly difficult for companies to manage a financing. Note that according to data from EY, there were only two deals that were priced in March (and none since March 11). The firm also forecasts that things may not rebound until the fall. This is based on surveys from Wall Street deal attorneys.
So what were the two companies that went public? Imara (NASDAQ:IMRA), which is a clinical-stage biotech company that focuses on treating rare genetic disorders of hemoglobin. The shares have gained about 1%. The other is GFL Environmental (NYSE:GFL), which is the fourth-largest diversified environmental services company in the U.S. Unfortunately, the offering was a bit of a dud, falling 25%.
Bottom Line on the IPO ETF
The strong relative performance for the IPO ETF is encouraging. It shows the importance of investing in next-generation companies as well as getting diversification across many holdings. In other words, this can allow for the softening of a major blow to the overall market.
And even though the IPO market may be quiet for a while, this is not necessarily a problem for the IPO ETF. Renaissance can keep companies in its index for up to two years.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.