IPO ETF: Hard To Know Where It Fits

seekingalpha06-21

Renaissance IPO ETF provides exposure to new US IPOs without the hassle of being a first buyer.The portfolio includes companies like Kenvue, Nu Holdings, Coinbase, Arm Holdings, and AppLovin.Sector ...

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But there are funds out there one can access that gets exposure to new companies. If you’re bullish on more companies coming to market that you want access to without having to deal with the rat race of being the first buyer, you may want to consider the Renaissance IPO ETF (NYSEARCA:IPO). This fund provides unique exposure to a portfolio of the largest and most liquid US newly issued IPOs. It’s a rules-based, passively managed ETF that tracks the Renaissance IPO Index, a proprietary index of the largest and most actively traded US IPOs, and incorporates a systematic process for admitting new listings and removing older constituents after three years. A Look At The Holdings The portfolio is intended to demonstrate the dynamism of the IPO market. It currently has 53 companies, with no position making up more than 10.16% of the portfolio.   renaissancecapital.com What are these companies? Kenvue (KVUE), formerly a spin-off of Johnson & Johnson (JNJ), focuses on consumer health and has a number of well-known brands, including Tylenol, Zyrtec, Neutrogena, etc. and the list goes on. It clearly sees a good bet on burgeoning worldwide spending on consumer health. Nu Holdings (NU) is a digital banking platform in Brazil. Coinbase (COIN) is one of the largest crypto exchanges, facilitating access to the digital asset ecosystem. Arm Holdings (ARM) produces low-power chip designs which are pervasive not only in smartphones and tablets, but also in billions of connected devices that constitute the Internet of Things. And AppLovin (APP) is a technology company that provides a complete platform for mobile app developers to increase the productivity of their apps and monetize their apps’ activities, as well as to connect with billions of users on advertising platforms. As you can see from the top holdings, this isn’t a thematic ETF, in that it’s not trying to track some specific part of the marketplace. It’s just targeting new companies. Sector Composition When we look at the sectors, the two largest holdings are in Tech and Financials. The Tech side makes a lot of sense given all the money that continues to flow there.   renaissancecapital.com It’s rare to see a fund that has both Tech and Financials at the top, which I find interesting as these two sectors tend to straddle two very different style tilts (Tech for growth, Financials for value). Either way, the sector composition overall clearly tilts more cyclical, and isn’t defensive given the lack of Utilities and minimal allocation in Health Care holdings. Peer Comparison The Renaissance IPO ETF isn’t the only IPO ETF in town. So let’s take a look at how it compares against the First Trust US Equity Opportunities ETF (FPX). This fund tracks the IPOX 100 US Index of the 100 largest US IPOs by market cap. FPX holds the companies for the first 1,000 trading days after the IPO. When we look at the price ratio of the two, we find that despite some ups and downs in terms of relative performance, IPO and FPX have roughly the same performance since pre-Covid. No real edge in my view.   stockcharts.com Pros and Cons On the positive side, IPOs are often from companies on the leading edge of innovation, especially those disrupting industries or offering novel technologies. Holding the Renaissance IPO ETF provides direct exposure to those companies and allows investors to profit from their growth trajectories. In addition, the ETF’s diversified portfolio of new issues in various sectors (again, primarily Financials and Tech) allows for investors to mitigate the risk inherent in investing in small cohorts of IPO stocks. I also like the fund’s rules-based approach as it combines definitive criteria (minimum financials, minimum underwriters, minimum allocated shares, minimum returns on equity, etc.) with the expertise of Renaissance Capital. What are the negatives? IPOs can be especially volatile given price discovery in the initial years post-launch. If the market were to unexpectedly dip, or if IPOs confronted special new rules and regulations, the fund could be disproportionately impacted. Conclusion  I think this is unique, but I have a hard time justifying the fund. The Renaissance IPO ETF issue is: There’s no clear theme in terms of what the fund is aiming for, other than just new companies that may or may not work in sectors that change in terms of weightings depending on the cycle we are operating in. I get there’s an appeal here for plenty of investors, I just don’t know how to think of how this fits in an overall asset allocation. Still - good fund for what it’s trying to do.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2445724022"}