IPO Market Back On Track: ETFs To Tap

After several lackluster quarters, the U.S. IPO market gained momentum in the second quarter of 2017, with 52 companies completing their IPOs raising nearly $11 billion. This marks the most active quarter in two years as per IPO research intelligence Renaissance Capital. The number is well above 25 IPOs in the first quarter and 34 in the year-ago quarter (read: How to Play the Hottest IPO Market in Years).

In terms of deals, healthcare companies topped the list with 14 deals worth $1 billion, closely followed by technology companies with 12 deals worth $1.6 billion. The financial sector was in third position with eight deals valued at $0.9 billion.

The upsurge were credited to a surging stock market, improving economic fundamentals and increasing consumer sentiment that led to the appeal for new stocks with high growth potential. Most of the companies that went public last quarter have outperformed the broader markets and often generated over 40% returns.

The IPOs in the consumer discretionary sector led the way higher with the fast-growing specialty retailer Floor and Decor Holdings FND returning 87% since its debut on April 26. Technology IPOs also outperformed with a low-code software developer Appian Corp. (NASDAQ:APPN) surging 51% since its debut on May 24 and a computing memory maker SMART Global Holdings (NASDAQ:SGH) climbing 47.2% since it went public on May 23. In the healthcare space, Biohaven Pharmaceuticals (NYSE:BHVN) and Athenex (NASDAQ:ATNX) are up 47.1% and 45.5%, respectively since their IPOs.

Meanwhile, the largest IPO of the second quarter was cable provider Altice USA (NYSE:ATUS) , which raised $1.9 billion and turned out the biggest US telecom IPO since 2000.

What’s Hot on Wheels for 2H?

The solid IPO trends is likely to continue as a large number of companies that had already filed last year or in the first half this year are ready to come up with their IPOs in the second half. This is especially true, as 64 companies are currently in the pipeline of going public and seeking to raise a combined $19 billion. The biggest IPO deal will come from meat processor JBS Foods International (JBS), which could fetch over $2.5 billion (read: U.S. IPO ETFs Recoil in 2017, What Lies Ahead?).

The IPO bunch of other well-known companies include sales and marketing firm Advantage Solutions (ADV), Alibaba-backed Chinese logistics firm Best, U.S. airline Frontier Group Holdings (FRNT), food supplier Dole Food Company (DOLE), online real estate brokerage Redfin (RDFN) and two large chemicals manufacturers, Venator Materials (VNTR) and PQ Group Holdings (PQJ).

How to Play?

With a large pipeline and some reputable companies likely to go public in the second half, 2017 is on track for 160-200 IPOs raising $40 billion or more. While investing in many IPOs at the same time could be difficult, investors could easily tap the IPO resurgence with the two domestic-focused ETFs discussed below:

Renaissance IPO ETF (TO:IPO)

This fund provides exposure to the largest and most liquid newly listed companies by tracking the Renaissance IPO Index. New companies seek inclusion on a ‘fast entry basis’ on the fifth day of trading. The fund currently holds 45 stocks in its basket with each accounting for less than 10% exposure. From a sector look, technology and consumer discretionary are the top sectors accounting for 30% and 20% share, respectively, while industrials round off the top three with double-digit allocation.

The fund has amassed $13.7 million in its asset base while it trades in a light volume of less than 4,000 shares, probably implying additional cost beyond the expense ratio of 0.60%. The product has crushed the broader market in the year-to-date time frame, having returned 21.2% compared with 8.2% for SPY (NYSE:SPY) (see: all the Total U.S. Market ETFs here).



First Trust US Equity Opportunities ETF (V:FPX)

This ETF focuses on the largest, best performing and most liquid U.S. IPOs and follows the IPOX-100 U.S. Index. New companies can find entry into the fund’s holding after trading for a minimum of 100 days. In total, the fund holds 101 securities in its basket with the largest allocation going to the top two firms – AbbVie (NYSE:ABBV) and The Kraft Heinz Company (NASDAQ:KHC) – with over 9% share each. Other securities hold no more than 6% of the assets. The product has a nice mix of sectors, with the top four being information technology, health care, consumer discretionary and consumer staples.

The fund has accumulated $841.4 million in AUM and sees volume of about 74,000 shares per day. It charges 60 bps in fees a year and has been handily beating the broader market, gaining 10.3% so far this year.



Bottom Line

Considering the most anticipated offerings this year, investors seeking to take advantage of new growth stocks could definitely bank on these two ETFs. The huge success of the new listings and a prosperous IPO industry would further drive the funds.

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