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Intriguing play on the IPO and spin-off field

Posted by: Aaron Pressman on April 17, 2006

I have to admit that I started off fairly skeptical about the new IPO exchange-traded fund. There might be reasons to invest in a passively-managed index of initial public offerings, but I couldn’t think of one. Aren’t there lots of dogs and obvious frothy plays mixed in among the gems? But that was before I looked at the index actually underlying the First Trust Advisors IPOX-100 Index Fund (Symbol: FPX). Turns out you can trust the market to properly weigh the good plays from the bad.

The index is comprised of the 100 companies with the largest market capitalizations in the IPOX Schuster Index. This index, we learn in the prospectus, is made up of IPOs and spin-offs starting on the 7th day after they begin trading through the 1,000th day of trading. The 100 index used by the ETF is reset quarterly and though it is cap-weighted no one company can exceed 10% of the total weight. More details are on the IPOX Schuster web site though be sure to use Internet Explorer. My initial visit with Firefox got lots of missing and mis-rendered pages.

I knew based on University of Florida professor Jay Ritter’s research that IPOs of more established companies tend to perform better, but I was surprised at just how well the market-cap filtering index has done. Last year, it gained 23% versus 3% for the Russell 2000 and S&P 500. Over the past 3 years, it gained an annualized 33.8% versus 15.1% for the S&P and 28% for the Russell. It’s also outperformed over the past 10 and 15 years though it slightly trailed the Russell (by 22 basis points a year) over the past 5 years. It’s mostly growth-type companies so the lag during a period of value outperformance may not be surprising. Volatility has been greater than the S&P but less than the Russell. So it pays to do your homework on this one and look at the stats.

The top 10 holdings of the 100 index are all well-known names including Genworth Financial (GNW), the Chicago Mercantile Exchange (CME) and that big Internet search company…what’s it called? Lots of people are calling for a comeback of megacaps but maybe this time the fresher picker-upper is the better bet?

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Reader Comments

Roger Nusbaum

April 17, 2006 07:18 PM

thanks for the note.

I think FPX is similar to the water ETF (client and personal holding) in that it is meant to be one theme but captures a couple of others. I'm not sure if that is part of the intention or not but it is clever.

The other thing is that I saw somewhere on the site that a similar Euro IPO ETF may come soon as well.

Eric G

November 14, 2008 07:29 PM has recently been redesigned and should work fine in Firefox.

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