An IPO ETF is exactly what it sounds like, namely, an exchange traded fund that holds shares of stock in companies that have recently launched initial public offerings. In principle, an IPO ETF combines all the benefits of ETFs, including diversity, liquidity, and transparency, with the potential high-growth and high-yield advantages IPOs.   

The financial consultants on Ingalls & Snyder, LLC’s 6th Avenue Team routinely review and analyze IPO ETFs that might serve their client’s needs. When we do recommend an IPO ETF for one of our client’s portfolios, that recommendation will be based first and foremost on the detailed financial plan that we develop in consultation with the client. 

 

How Does an IPO ETF Work?

All IPO ETFs hold securities in companies that have recently made shares of their stock available for public trading. Apart from this common feature, different IPO ETFs will focus on different investment approaches:

·       Time of Purchase.  The per share price of many IPO stocks will show strong growth in the first few days or weeks after the initial offering, and lower prices after that initial euphoria wanes. An IPO ETF might limit its purchases to stocks that have been trading for a certain amount of time in order to avoid those price reductions.

·       Buyand-Hold Strategies. Some IPO ETF’s will hold IPO stock for only a few months, whereas others might adopt a defined strategy of holding their assets for two to four years.

·       Small or Large Cap. IPO stocks with smaller capitalizations generally do not perform as well as mid- or large-cap stocks, but smaller-cap IPOs present greater chances for significant growth. IPO ETFs typically define the capitalization range of the IPO stocks that will be included in their holdings.

·       Industry Sectors. An IPO ETF might use a strategy of only investing in biotech IPOs, whereas other IPO ETFs might not limit themselves to specific industry sectors.

Keep in mind that an IPO ETF’s investment rules can limit an investor’s exposure to certain risks, but those same rules can also preclude the ETF from investing in popular IPO stocks during an early growth phase.

 

Are IPO ETFs Appropriate for You?

Investing in an IPO ETF may be appropriate if the specific IPO ETF that the investor chooses meets the criteria that define the investor’s greater financial goals.  Investing in IPOs is an aggressive strategy that is not appropriate for every investor. Further, an IPO ETF investment may be suitable only at certain points in an investor’s timeline. Thus, the only way to determine if an IPO ETF is appropriate is first to understand the investor’s goals, and then to measure the IPO ETF against those goals, both when the goals are first defined and continuously with the growth and evolution of the investor’s wealth management strategies.

 

Selecting the right IPO ETF that meets an investor’s financial goals and strategies within the profile of that investor’s risk tolerance presents unique challenges. IPOs are an inherently riskier investment asset because they have no trading history, which relegates investors to make their IPO investment decisions solely on the basis of the management team’s abilities, the company’s proposed business plan and information made available to the public in a prospectus.

Nonetheless, like all exchange traded funds, IPO ETFs offer advantages over investments in single IPO stocks.  Some of those advantages are:

·       Diversification. An IPO ETF will invest in several different IPOs, each of which meets the investment rules that are established for the fund. This shields investors from dramatic price swings that may affect the value of any single IPO stock and in theory provides a smoother price curve for the IPO ETF’s shares.

·       Liquidity. Individual IPO stocks, by themselves, are liquid, but the trading volume of some IPOs may be low, thus limiting liquidity or depressing the company’s stock price. Investors that are concerned with liquidity can invest in an IPO ETF that has better trading volumes than any individual IPO stocks.

·       Information History. Several IPO ETFs have been actively traded for four years or more, which gives investors an opportunity to review the fund’s performance over a longer period of time. This reduces the uncertainty that is an intrinsic part of investing in a single IPO stock that has no benchmarks or any track record for investor analysis.

Just put this as a qualifier since there are other advantages such as access/exposure to IPOs.  Individual retail investors are often shut out, especially if it is a high demand IPO.  Institutions such as funds are more likely to get an allocation.

 

No IPO stock and no IPO ETF will be the perfect investment asset for every investor. The investment advisors on the 6th Avenue Team develop tailor-made investment plans for each of their clients. Those recommendations may change as an investor’s wealth and financial circumstances evolve, and we constantly monitor that evolution to verify that the investor’s assets are serving his or her unique goals and requirements.

 We serve the distinct wealth management needs of high net worth individuals, institutions, and not-for-profit organizations. Please see our website for more information about IPO ETFs, or call our midtown Manhattan offices to schedule an in-person appointment with one of our financial advisors.

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