Investing in New Public Companies for the Long Run

Initial public offerings (IPOs) are when a private company’s stock is offered for sale to the public, typically as a way to raise capital and expand. The First Trust U.S. Equity Opportunities ETF (FPX) seeks to capture a portfolio of IPOs that will outperform the average market.

Exchange-traded funds (ETFs) which focus on IPOs are special in that they provide exposure to new public companies before they join the other core U.S. equity indexes. This provides investors with a better chance to benefit from the initial surge in stock price that frequently occurs in a new public offering. FPX shares this same trait, but is also focused on IPOs more likely to deliver stronger performance in the long-run. This makes FPX a popular choice among investors that employee a buy-and-hold strategy.

As a growth fund that grants investors exposure to U.S. Equity Capital and Private Equity Activity, FPX includes in its portfolio the 100 largest U.S. IPOs during the last four years. These companies also are typically among the best-performing and most liquid U.S. companies. FPX caps exposure to all of its 100 firms at 10%, and rebalances its list of companies on a quarterly basis.

With each quarterly rebalancing, firms aging out of the fund are removed and fresh IPOs are added, giving FPX a constant supply of “young blood.” FPX has historically captured around 85% of the total market capitalization created through U.S. IPO activity during the last four years, with a tilt towards mid- and large-cap stocks. FPX is a fund that moves with and constantly adjusts to the times.

The fund is around 20% invested in health care and technology — two fastest-growing sectors and two of the hottest IPO sectors — with consumer defensive, consumer cyclical and financial services coming in next with 14% each. FPX sports an expense ratio of 0.60% and a dividend yield of 0.75%.

Incepted in April 2016, FPX holds a compound return of 10.5% per year over the last 10 years, beating out the S&P 500’s 6.9% per year. Over the last year, FPX held a return of 22.09%, beating out the S&P 500’s return of 19%. Currently, FPX returns around 3.3% year to date on total assets of $647.23 million.

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