It’s the final stretch for InvestorPlace.com’s best exchange-traded funds contest, with one quarter left. My pick for the contest, the Renaissance IPO ETF (NYSEARCA:IPO), has seen a major bull move this year. In fact, it’s in the No. 1 spot for the contest, with a sizzling return at 68%.
I’ve been following the Initial Public Offering (IPO) market since the mid-1990s. It’s really a passion of mine. After all, it’s always fascinating to see breakout companies hit the equities markets.
Yet the IPO market is also known for extreme volatility. A prime example of this was the dot-com boom. After it burst in 2000, many investors suffered major losses. There was also little activity for new offerings for the next few years.
IPOs This Year
According to Renaissance Capital, the third quarter saw the most activity since 2000 for IPOs. There were 81 offerings that raised a whopping $28.5 billion and the average first-day gain was 39%. By comparison, the S&P 500 was up about 6%.
There has been an insatiable appetite for tech company deals, especially those that focus on business markets. Just look at Snowflake (NYSE:SNOW). The company, which operates a cloud-native database platform, raised a hefty $3.36 billion (this was actually the largest software deal ever) and the stock price soared by 112% on the first day of trading. Its market capitalization? $67 billion. Not bad for a company that has been around since 2012.
Now this is not to imply that only tech deals have done well. There has been substantial interest with healthcare operators as well, which have accounted for nearly half of the deal activity. The total amount raised is close to $8 billion.
When it comes to the best ETFs contest, a fund will usually have a few big gainers that move the needle. But the IPO fund has been different. The gains have been large across the portfolio.
Let’s take a look at some of the top holdings:
- Zoom Video Communications (NASDAQ:ZM): The company’s videoconferencing system has been a must-have for companies that have gone remote with their workforces. For the July quarter, Zoom reported sales of $663.5 million, up from $145.8 million. There was a profit of $185.7 million. As for the full-year guidance, the company expects revenues to range from $2.37 billion to $2.39 billion and operating profits to be between $730 million to $750 million.
- Peloton Interactive (NASDAQ:PTON): As large numbers of people do not have access to the gym, they have purchased Peloton bikes. And growth has been staggering for the company. In the fiscal fourth quarter, revenues came to $607.1 million, up 172% on a year-over-year basis. The company also reported 1.09 million subscribers who paid $39 per month.
So what about the fourth quarter? There are no signs of a slowdown. In fact, there are various high-profile IPOs that are expected to hit the markets, such as Airbnb and DoorDash.
IPO Will Remain One of the Best ETFs
It’s true that the IPO market is looking frothy. The valuations are at stretched levels and the sentiment is at extreme levels. Then again, IPO growth trends can last awhile. During the dot-com era, the good times continued for about four years or so. But even during this massive bull run, there were corrections. Some of them were quite brutal, such as in the fourth quarter of 1998.
Thus, when it comes to investing in IPOs, it’s a good idea to have diversification — this is what the IPO fund provides. The portfolio has 42 holdings and the stocks are switched out every couple years. All in all, the ETF is a pretty good way to get exposure to the IPO market.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.