Shares are then held for a two-year period. That holding period reflects the fact that newly trading firms are often eventually added to major indexes such as the S&P 500. Smith believes that her firm’s Renaissance IPO ETF offers a way to diversify away from index-based funds.
Over the years, IPO investors have been able to choose between the Renaissance Capital product and the First Trust US IPO Index Fund (FPX). However, the latter fund changed its name to First Trust US Equity Opportunities ETF in late 2016 (it maintains the FPX ticker), reflecting the fact that it wasn’t actually squarely focused on IPOs per se.
For sure, it does invest in recent IPOs. For example, a company like Lyft is eligible for inclusion six days after an IPO event and at the next quarterly index rebalancing. But the FPX fund focuses on corporate spin-outs of existing legacy (and often slow-growing) divisions of larger firms; on parent firms themselves that have spun off divisions; and on corporations that have bought companies that had IPOs within the past four years, which is fund’s holding period for IPOs. Current top 10 holdings include PayPal, Verizon and General Mills.
That’s not to say that this approach lacks appeal. The FPX fund, which has a 0.59 percent expense ratio, has also outgunned the S&P 500 over the past three years with its 15.2 percent yearly return in that time. Meanwhile, it has garnered $1.1 billion in assets.
Investors can opt to tap into the global IPO market with the Renaissance International IPO ETF (IPOS), though with just $2.1 million in assets this fund hasn’t resonated with investors despite a four-and-a-half-year trading history.
Smith cautions that investors shouldn’t focus solely on high-growth tech firms when considering IPOs.
“These stocks can be very volatile as long as they are losing money,” she says. Lyft, for example, lost nearly $1 billion in 2018, and investor interest may start to wane if the firm can’t show a path to profitability.
That’s why Smith thinks that more seasoned comapnies also make for appealing IPOs. She cites Zoom Video as an example. “They are doubling their sales, are already profitable and have a strong product line,” she says. She also thinks that firms such as recent IPO Levi Strauss can use their fresh infusion of capital to find ways to grow faster than their peers.
Still, high-growth, high-risk firms such as Lyft, Uber and Pinterest are likely to land in the Renaissance IPO ETF as well, providing investors with diversified access to the now-thriving IPO market.