How investors benefit from an IPO with ETFs

Coinbase has been listed on the Nasdaq since April 14thIMAGO / Levine-Roberts

The market situation for IPOs is excellent. Airbnb, Snowflake, Palantir and Lemonade have had phenomenal stock market launches in the recent past. In Germany, the online used car dealer Auto1 made a great stock market debut at the beginning of the year. And the next few months await with many more exciting Initial Public Offerings (IPOs).

It is relatively difficult for private investors to participate in an IPO. It is mostly the subscription requests of institutional investors that are taken into account by the syndicate banks before the shares are issued for the first time. Private demand often plays a subordinate role. For them, IPO ETFs can be an interesting option. These do not acquire any paper before the actual listing and thus also not at the IPO price. However, they contain a large number of newcomers to the stock exchange and benefit from increases in value on the flourishing IPO market. Over the year as a whole, IPO ETFs clearly outperformed the US S&P 500 stock index.

The largest ETF with an IPO focus is the First Trust US Equity Opportunities ETF with total net assets of $ 1.9 billion. The biggest competing product is the Renaissance IPO ETF with a total of 562 million US dollars in assets under management. This is traded in Germany on the Munich Stock Exchange. The two ETFs track the performance of IPO indices that are focused on the United States. Both First Trust and Renaissance also have global counterparts: the International Equity Opportunities ETF and the International IPO ETF, respectively. The latter also contains the German companies Teamviewer and Auto1.

The differences between IPO ETFs are not obvious at first glance. “You have to pay attention to what kind of strategies you are pursuing in detail,” explains Julian Horky, Head of Risk Controlling at Berenberg Markets. “Which securities are bought and when, how long are they held?” Buying takes place at Renaissance on the fifth trading day, at First Trust at the end of the sixth. In this way, the sometimes enormous price fluctuations of the first few days of trading are deliberately avoided. The biggest difference between the ETFs is their holding period: While First Trust holds company shares for four years, with Renaissance they are already thrown out of the portfolio after two years.

Advantages and disadvantages of IPO ETFs

IPO ETFs also have different minimum admission criteria, for example with regard to market capitalization or free float. And they weight their positions differently. According to its own information, Renaissance invests in the top 80 percent of all IPOs, measured by their market capitalization. The ETF currently contains 63 titles, led by the video chat service Zoom with a weighting of 9.25 percent and the transportation service provider Uber with 8.25 percent. First Trust, on the other hand, invests in the hundred most recent, best-performing IPOs. The social media company Snap ranks first with 9.53 percent, followed by Uber with 5.41 percent.

“The advantage of such IPO ETFs is, among other things, that they invest in a number of newcomers to the stock market that may not even appear in the major indices such as the S&P 500,” says Horky. This enables them to participate in stock market trends earlier than is the case with other ETFs. In addition, there is the question of time for investors who like to be among the first: “I don’t have to actively deal with every single IPO, nor do I always have to open a custody account with the syndicate bank,” says Horky.

The investment expert sees the disadvantage of such passive participation in not being able to benefit from potential highs on the first day of trading, the so-called IPO pops. “The investment banks set the issue price below actual demand. They don’t want to sit on the papers they are holding, ”explains Horky. And the higher the demand on the broad market, the greater the short-term upturn on the first day of the stock exchange. Last year, the average IPO pop was 38 percent, according to Nasdaq analysts. “The only way to participate in these price jumps is if you receive an allocation at the issue price, that is, if you get involved in the IPO process,” says Horky.

That can also go wrong, as shown for example by the failed stock market launch of Uber. The choice between an active IPO participation and an investment in an IPO ETF is ultimately also a question of personal risk appetite. “In any case, IPO ETFs are a good opportunity for investors to further diversify their own portfolio,” says Horky.

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