First Trust Global Portfolios Limited (FTGP) has launched the First Trust US IPO Index UCITS ETF. The Fund began trading on the Euronext Paris on 17 August 2015 and on the London Stock Exchange on 18 August 2015.
The Fund is based on the IPOX-100 US Index, a rules based, modified value-weighted price index measuring the performance of the top 100 US-domiciled companies ranked quarterly by market capitalisation in the IPOX Global Composite Index. The Index measures the average performance of US public offerings (IPOs) during the first 1000 trading days. Index constituents are selected based on quantitative initial screens. The Fund only tracks recent IPOs and spin-offs. Therefore, there is very little overlap with traditional index funds, which generally have a waiting period before adding IPOs/spin-offs. As a result, a portfolio of recent IPOs may complement a core equity holding by providing more complete exposure to the total equity market.
“We’re pleased to extend our relationship with First Trust Portfolios to help European investors gain exposure to US IPOs and Spin-offs via our benchmark IPOX-100 US Index,” says Josef Schuster, Founder of IPOX Schuster LLC. As at 31 July 2015, the Index had a market capitalisation of approximately USD1.3 trillion.
It is common for the closing market share price shortly after the IPO to be well above or below the initial offering price and it is difficult to predict which IPOs will be successful. Often the motivation to invest in an IPO is the potential to receive a short-term gain, regardless of a stock’s longer-term potential for success or failure. The Index takes a different approach. Constituents may be added to the Index on the sixth day of public trading; and therefore, the Fund may not have access to the gains derived from the initial run-up in an IPO’s price. However, there is a case to be made for investing in a diversified portfolio of recent IPOs and spinoffs beyond potentially participating in an unusually large return from a stock’s initial day of trading.