How An ETF Can Solve The IPO Conundrum

For those investors who want to invest in initial public offerings (IPOs) but would prefer to spread the risk out over a few companies, an exchange traded fund (ETF) could be the answer.

IPOs are initial public offerings from a company that has decided to go public, but aside from a few blockbuster launches, it can be tough to sort out which companies will deliver and which will falter. An ETF that tracks them allows investors to play more than one IPO company at a time to help spread the risk out and to diversify, lessening the overall risk factor.

The IPO ETF tracks the IPOX-100, which  follows the U.S. market for IPOs in the Renaissance Capital IPO Index.

• This  is composed of the 100 largest IPOs by capitalization of $50 million or more, explains Richaard Wilson for Investopedia.
• The IPOX Composite does not include companies with a more than 50% gain on the first day of trading; this was put in place to avoid those securities which were thinly traded or overly traded to help cut market volatility.
• Companies are only included in the index on their seventh day of trading in order to miss the initial mad rush for a blockbuster launch.
• Companies are taken out of the index on their 1,000th day of trading, in order to make room for some fresh blood.

After the so-called dot com bubble, many companies that are going public are now under much more scrutiny. Underwriters are much more discerning and accurately price IPOs better than before, giving the IPO market more stability and predicatability.

• First Trust IPOX-100 (FPX): up 31.2% year-to-date

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