Never mind choppy market conditions. The hunger by investors for initial public offerings has stayed surprisingly steady. Will it continue?
U.S. IPOs raised a sizzling $15.6 billion during the first quarter, according to Renaissance Capital. That was the best quarter for proceeds raised by newly minted public companies in three years. Moreover, the IPO market has already vacuumed in almost $25 billion through late April, putting it on pace to beat the $35.5 billion raised for all of last year.
What’s been this year’s difference maker?
High-profile IPOs in 2018 have piqued investor interest. Familiar names within the technology arena such as Dropbox (DBX) and Spotify (SPOT) have enjoyed early IPO success with strong investor demand. Dropbox, a San Francisco-based cloud storage company, jumped nearly 40 percent during its trading debut in March and the company now commands an $11.4 billion market cap.
Although Spotify, the Swedish company that is the world’s largest music streaming service, experienced a much cooler reception to its IPO earlier this month, that was probably more attributable to the company’s unconventional launch. Instead of using Wall Street underwriters to set its opening share price, Spotify opted for a direct listing on the New York Stock Exchange. Despite a rough start, Spotify’s market cap still tops $27 billion.
The health of the IPO market is one barometer for measuring the market’s craving for young companies and, as such, can provide insight into investors' risk appetite. There are a trio of exchange-traded funds that enable investors to invest in IPOs with less risk than investing in individual IPO companies.
Two U.S.-focused funds—the Renaissance IPO ETF (IPO) and the First Trust IPO Index Fund (FPX)—are up 1.26 percent and 1.18 percent year-to-date, respectively. Meanwhile, one example of an ETF tied to the total U.S. stock market, in this case the Schwab U.S. Broad Market ETF (SCHB), is down 0.70 percent this year.
FPX launched in 2006 and has just over $1 billion in assets. The fund’s underlying index holds a basket of 100 companies and leans heavily toward U.S. large- and mid-cap stocks. Around 40 percent of FPX’s sector exposure is to technology stocks and the fund charges annual expenses of 0.60 percent. Top holdings include PayPal, AbbVie, and The Kraft Heinz Company.
FPX’s gain of 19 percent during the one-year period ending April 24 easily outdistanced the S&P 500 during that time, and it has outperformed the S&P 500 during the five-year and 10-year periods (but it has underperformed during the three-year period).
The IPO fund debuted in 2013 and has the bulk of its exposure in mid-cap (70 percent) and large-cap (19.3 percent) stocks. Top holdings include Snap, Invitation Homes and U.S. Foods. The fund has $18.7 million in assets and charges 0.60 percent annually. This ETF’s one-year performance smoked that of the mid-cap growth category (as measured by the fund’s net asset value, according to Morningstar), but trails on a three-year basis.