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Source: istock

Investing in IPOs? Consider These IPO ETFs

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Many investors are attracted to IPOs. There are success stories of IPOs delivering phenomenal returns. Amazon and Tesla have delivered phenomenal returns since their IPOs. Shopify and Zoom Video Communications have risen sharply since their IPOs. You can invest in IPOs individually through your broker. You can also consider ETFs and mutual funds that invest in IPOs. So, what are the best IPO ETFs in 2020?

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Best IPO ETFs

IPO ETFs invest in companies that have recently gone public. There are six IPO ETFs.

  • the First Trust U.S. Equity Opportunities ETF
  • the First Trust International Equity Opportunities ETF
  • the First Trust IPOX Europe Equity Opportunities ETF
  • the Renaissance IPO ETF
  • the Renaissance International IPO ETF
  • the Invesco S&P Spin-Off ETF
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Classifying IPO ETFs

We can classify the above-mentioned ETFs into U.S.-focused and international IPO ETFs. These ETFs invest in stocks of companies after the IPO. The ETFs don't invest in pre-IPOs. There are some funds like the Firsthand Value Technology Fund that invest in companies that are in the pre-IPO stage.

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The First Trust U.S. Equity Opportunities ETF, founded in 2006, was the first ETF to focus on IPOs. The ETF invests in the IPOX®-100 U.S. Index, which invests in the top 100 large and liquid IPOs. The First Trust U.S. Equity Opportunities ETF has the highest assets among the IPO ETFs, according to data compiled by ETF.com. The ETF charges a fee of 0.58 percent.

The Renaissance IPO ETF invests in the basket of securities in the Renaissance IPO index. According to the company, “The Renaissance IPO Index reflects approximately the top 80% of newly public companies based on full market capitalization, is weighted by free float capitalization and imposes a 10% cap on large constituents.”

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The company also said, “Sizeable IPOs are added on a fast entry basis and the rest are added during scheduled quarterly reviews. Companies are removed two years after their initial trade date, when they become seasoned equities.” Zoom Video Communications, Uber Technologies, and Pinduoduo are the ETF's top three holdings. The Renaissance IPO ETF charges a fee of 0.60 percent.

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IPO ETF funds

The Renaissance International IPO ETF invests in stocks of newly non-U.S. listed IPOs and tracks the returns of the Renaissance International IPO index. The ETF charges a fee of 0.80 percent. The First Trust International Equity Opportunity ETF also invests in non-U.S. listed companies and has a fee of 0.70 percent. The First Trust IPOX Europe Equity Opportunities ETF invests in a portfolio of companies that are domiciled in Europe and have recently launched their IPO.

The Invesco S&P Spin-Off ETF invests in the S&P U.S. Spin-Off Index. The ETF invests in companies that have spun off from large companies in the last four years. While the Invesco S&P Spin-Off ETF isn't strictly an IPO ETF, we can still categorize it as one due to its exposure to spinoffs.

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Source: istock

Should you invest in IPO ETFs?

As noted previously, the IPO ETFs don't invest in the pre-IPO stage. They invest after the shares get listed. If you are looking for listing gains, IPO ETFs aren't for you. However, you should consider IPO ETFs if you are looking at medium to long-term exposure to companies that have recently gone public. 

Airbnb is among the most awaited IPOs of 2020. Some of the tech companies are also coming up with their IPOs. Tech IPOs have delivered strong returns over the last year. Zoom Video Communications has risen sharply from its issue price. 

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