A Renaissance for IPO Investors

The initial public offering (IPO) market is heating up faster than a $10 pistol, and now there’s a new IPO fund on the docket that allows investors to put their favorite new stocks in one basket.

IPO activity is way up these days, with 169 new offerings so far in 2013, which have combined to raise $40 billion in funding. All told, those IPOs have been good to investors, returning, on average, 39 percent over the same time period.

The last three months have been especially active, with 70 IPOs raising $18 billion in new revenues, with investment returns of 30 percent, according to NASDAQ.

With big, brand-name issues like Chipotle (NYSE: CMG) and Facebook (NASDAQ: FB) going public recently, and Twitter (bulging with its network of 200 million active users) set to explode with its own IPO later this year, it’s a great time to kick some tires with a new IPO exchange-traded fund (ETF).

That would be the new Renaissance IPO ETF (NYSE: IPO), released by Renaissance Capital just last week.

The new ETF, which is currently trading in the $21 range after popping up $2 in its first day of trading, is the right fund at the right time, if you ask the folks at Renaissance.

“The launch of the Renaissance IPO ETF is a direct response to increased investor demand for systematic exposure to newly listed IPOs in a low-cost tax-efficient exchange-traded structure,” offers Kathleen Smith, chairwoman at Renaissance Capital. “When added to core US equity holdings, a portfolio of unseasoned publicly traded equities provides investors with more comprehensive exposure to the full set of US public equities.”

Renaissance is looking to mirror the astounding recent success of its Global IPO Fund (IPOSX), which is up 43 percent so far in 2013 (the fund was released in late 1997, and offers a 7 percent average annual return over the past five years).

The new IPO ETF! is specifically designed to track what Renaissance calls “significant newly public companies” by mirroring  the “rules-based Renaissance IPO Index designed by Renaissance Capital’s research team to hold the largest, most liquid newly listed US IPOs,” the company says in a statement.

Renaissance has some hard-and-fast rules about what stocks qualify for the new fund, and when they’ll be kicked out.

The firm says that brand new stocks are plugged into the index “on a fast-entry basis on the fifth day of trading, or upon quarterly review, and are removed after two years when the IPOs become seasoned stocks.”

As of September 30, 2013, the key IPO plays that comprise the fund include: Facebook, at 11 percent of the fund; Zoetis (NYSE: ZTS), an animal health firm, at 10.1 percent; Michael Kors (NASDAQ: KORS), the luxury fashion brand retailer at 9.8 percent; automotive component maker Delphi (NASDAQ: DLPH), at 9.8 percent; and Workday (NASDAQ: WDAY), a cloud-based computing provider, at 4.5 percent.

By and large, IPO targets large-cap stocks, which account for 65 percent of the fund’s holdings. Mid-caps comprise roughly 33 percent, while small caps are an afterthought, making up 2 percent of the fund’s holdings.

Sector-wise, technology rules inside IPO, comprising 24.6 percent of all holdings, followed by financial stocks (18.4 percent) and consumer services (at 16.4 percent).

Renaissance also has its gun sights set on First Trust US IPO Index (NYSE: FPX), which has returned 34 percent so far in 2013, and boasts a three-year average return of 26 percent, and a five-year average annual return of 18 percent (it opened in 2006).

Renaissance will be quicker on the trigger than FPX, with its two-year window on deep-sixing fund holdings. FPX extends out much further hanging on to its “new issues” up to almost three years.

IPO is also more concentrated than FPX, holding 50 stocks comp! ared to 1! 00 stocks, respectively.

Despite the fact that FPX is more entrenched than IPO (and by a long shot), I like the newer fund’s chances for a quick return, and I’m recommending an immediate “buy” despite reservations over an 0.60 percent expense fee. That’s high for an ETF, but it’s the same 60 basis points charged by FPX, and that hasn’t slowed the First Trust IPO ETF down at all.

The facts on the ground say it’s a good time to be into IPOs, with new offerings like Facebook, Chipotle, and Potbelly (NASDAQ: PBPB) all registering strong gains after going public.

Sure, you can buy up these individual stocks, along with Kors and Workday, and Twitter when it rolls out, but for most investors, that’s not easy to manage given their standing in the IPO pecking order.

But a “ground floor” IPO ETF that allows investors to get in fairly early is a winner in my book, especially given the relative financial health of the IPO market going into 2014.

So go long on the new IPO play on the block. Renaissance looks like it’s ready to come out swinging, and you should, too.

Brian O’Connell is an investment analyst at Investing Daily. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets.