Unless you have been living under a rock, you probably know that 2022 was not a good year for the US stock market. If you checked your brokerage or retirement account statement recently, you may have been shocked to see the drop in your balance. SPY, an ETF which tracks the 500 largest stocks in the US, finished last year at -18.1%. But as bad as 2022 was for SPY, it was not as bad an ETF that tracks companies that recently had their Initial Public Offering (IPO). This ETF, which goes by the ticker symbol IPO and consists of some of the most well known tech names, ended last year at -57.2%. But while 2022 was a bad year for this ETF, it did exceptionally well in 2020 during the COVID bull run.
First, a brief refresher: an IPO is when the general public can buy shares in companies that have until that point only been available to employees and select private investors like venture capital firms. When a hot stock finally IPOs, it’s not uncommon for the stock to end the trading day much higher that its initial price as investors try to grab a piece of the company the believe has a bright future.
The advantage of the IPO ETF is that gives investors access to a basket of recent IPOs as opposed to individually picking and choosing which IPOs one should invest in. And as the ETF is tech-heavy (48% of the holdings were in the Technology sector at the end of February 2022), its become a good barometer of how good/bad things are going for the larger startups who have recently become public.
Here are some quick facts about this ETF:
- It was launched in October 2013 by Renaissance Capital
- It currently has $126 million Assets Under Management (AUM). In March of 2020, it had about $40 million AUM, and peaked at $1.05 billion AUM in February 2021.
- The ETF holds 89 different stocks, and the top 5 holdings currently are: Snowflake, Airbnb, Roblox, Coupang and DoorDash
- The fund is rebalanced every quarter and does not hold stocks that have been public more than three years
- Companies that go public through other ways besides IPO are also part of the index. For example, Coinbase (which is one of the fund’s current holdings) went public via a direct listing, which is different than a traditional IPO.
- The IPO ETF only covers that have had gone public in the US markets. However, the company itself does not need to be headquartered in the United States. Renaissance Capital has a separate ETF for International IPOs called IPOS.
How has this ETF performed? As mentioned earlier, 2022 was a bad year for this ETF. But the fund has generated positive returns over its lifetime. The lifetime returns of the IPO ETF are 41.5% (it was created about 9.5 years ago). However, that is lower than SPY, which returned 176.0%, and much lower than ETFs which hold larger tech companies, like QQQ and XLK, which have returned 324.7% and 413.0% during the same period.
2020 was a banner year for this ETF where it returned 107.9%, compared to 48.6% for QQQ, 43.6% for XLK and 18.3% for SPY. But by 2021 things had reversed. In that year the ETF returned -10.3%, compared to 27.4% for QQQ, 28.7% for SPY, and 34.7% for XLK.
On a yearly basis, SPY has outperformed IPO in most years. In the 9 full calendar years the IPO ETF has been around (2014 to 2022), it has outperformed SPY in three of them: 2017, 2019 and 2020.
In conclusion, investing in the IPO ETF gives investors access to the IPO market without having to try to pick and choose which companies will be winners and which won’t. If you are looking for a long term buy-and-hold option, ETFs that consist of more established companies (such as SPY, QQQ and XLK) have been a better option historically. But during some bull runs, this ETF can provide shorter term traders with some interesting opportunities.