Everyone loves a good initial public offering. The buzz over hot new listings and the stories of runaway successes have been fuelling investors’ optimism for generations.
Yet, even though everyone knows what IPOs are, people rarely invest in them. Sometimes, if a company’s product has a large consumer following, like in the cases of Facebook or Tesla, a larger crowd gets in on the action. But more commonly, it’s mostly professional investors who are in the know. And even then, a traditional mutual-fund investment portfolio will typically hold only a handful of newly-listed or spun-off companies.
Often, regardless of a company’s long-term potential for success, the primary interest of many investors seems to resolve around the short-term surges or drops in price of IPOs. But we feel the biggest opportunities can come from avoiding the first few days of trading and hold for the medium term.
This knowledge gap presents a unique investment opportunity. Investors have long known that IPOs and corporate spin-offs have special trading properties. It’s no coincidence, for example, that these stocks tend to soar on the first day of trading: public offerings tend to be under-priced to entice investors and compensate for the risk of betting on a new company.
But new listings can generate excess gains over the short and mid-term as well. People are often surprised to learn that, at any point in the last 15 years, at least 60% of the Russell 2000 market cap was generated by companies that were listed or spun-off during the previous four years.
And the proof, as they say, is in the pudding. The IPOX®-100 US index, structured specifically to capture the unique trading properties of IPOs and spin-offs – discussed later in this article – was launched back in 2004. Over the past 14 years, it’s generated over 6% of annualised outperformance over the S&P 500. This amounts to considerable gains, as illustrated by the chart below.
Source: FactSet, Bloomberg. Data shown is from 06/8/04-28/09/2018. Past performance is no guarantee of future results. This information is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes, brokerage commissions, and other expenses incurred when investing. An index cannot be purchased directly by investors. Please see endnotes for a definition of the indexes and investment terms.
IPOs and spinoffs are a surprisingly attractive theme
Investing specifically in IPOs and spin-offs is an example of thematic investing. Under this philosophy, investors are indifferent to whether a company is a technology stock or a farming stock, provided the firm is engaged with or directly affected by the desired theme.
We believe IPOs and spin-offs are a highly appealing theme thanks to two particular features:
1. Newly-listed companies commonly outperform over the short term. Because there’s no history of public reporting, such companies are perceived as riskier, and market expectations adjust for a higher payoff. The greatest returns are also where the stakes are highest, with outsized returns delivered by the larger IPOs:
IPO Performance by Market Cap
by months following listing
2. Post-listing performance is commonly – and we believe mistakenly – considered volatile. In the longer term, company performance tends to cluster: some companies emerge as clear winners, others fail miserably, and the majority display a generally lacklustre performance. As illustrated above, the median performer delivers little-to-no gains over a four-year horizon.
This shows why stock-picking IPOs is so tricky: if you get lucky picking just the right IPOs, returns could be massive. But in all probability, and with limited information, you’re likely to pick a dud.
Investors can potentially capture the gains from the two features above through the First Trust US IPO Index UCITS ETF (The “Fund”). This Fund tracks the IPOX®-100 US IPO Index, whose construction process is outlined in the table below:
A new way to diversify
In recent years tech listings have generated most of the buzz. But, as the chart shows, the Fund is particularly well-diversified on a sector basis.
The sector allocation also reflects the wider economic climate, since the only companies able to raise cash are those whose business model the market finds sufficiently attractive. For example, back in 2008 – and ahead of the financial crisis – the index rebalanced to reflect a rotation into safer plays like consumer staples.
The Fund also acts as a quality sift. True, there were fewer-than-average IPOs in 2008 and 2009 (though far from zero). But it’s only companies with a highly viable business that can raise funds during an economic downturn.
The listing of a company doesn’t just reflect a competitive edge – it also helps create it. By getting cash in the door, newly listed companies can expand their marketing and sales teams and go after new markets. They’re also able to invest in R&D.
With only 4% of the companies held by the Fund featuring as constituents in the S&P500, the Fund offers material diversification* opportunities. In an upcoming webinar, we’ll be discussing some of the key holdings.
Thematic investing enables the client to gain exposure – with a single transaction – to a group of companies tied together by a theme, rather than their country of domicile, sector classification or exchange listing. IPOs and spin-offs represent a highly attractive theme, which is also backed by a wealth of data.
First Trust is one of the largest players in thematic ETFs, as well as the 6th largest ETF sponsor in the US. Since the firm’s inception, First Trust has successfully launched a series of thematic products, in areas including IPOs, the internet, cyber security and blockchain.
Join our upcoming webinar, presented by First Trust senior product specialist Gregg Guerin, to hear insights on how IPOs can potentially deliver gains – not just to companies– but to you.
*Diversification does not guarantee a profit or prevent against a loss. Mention of specific securities should not be considered a recommendation or assumed to be profitable.
The Russell 3000® Index is comprised of the 3000 largest and most liquid stocks based and traded in the U.S.
The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance.
The S&P MidCap 400 Index is an unmanaged index of 400 stocks used to measure mid cap U.S. stock market performance.
The S&P SmallCap 600 Index is an unmanaged index of 600 stocks used to measure small cap U.S. stock market performance.
A patent with respect to the IPOX® index methodology has been issued (U.S. Pat. No. 7,698,197). IPOX® is a registered international trademark of IPOX® Schuster LLC (www.ipoxschuster.com).
The Fund’s shares may change in value and may go down as well as up. You could lose money by investing in the Fund.
You may not get back all of the money you invest.
The Fund is subject to market risk, which means that shares of the fund may fall in value due to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in securities prices.
There may be tracking difference between the Fund and the underlying index due to the impact of annual Fund management fees. Therefore the Fund’s return may not match the return of the IPOX®-100 U.S. Index.
The Fund’s holdings may be issued by companies concentrated in a particular industry or country.
The Fund may invest in small capitalisation and mid capitalisation companies. Such companies may experience greater price volatility than larger, more established companies.
As the Fund’s investments may be denominated in currencies other than the Fund’s currency, an investment in this Fund may expose you to currency risk.
This Fund’s Net Asset Value (NAV) is likely to have high volatility due to the portfolio composition and/or the index replication technique. As such, potential investors should be aware that the Fund’s shares will change in value, and may do so in a volatile fashion; potential investors could lose money by investing in the Fund.
Neither First Trust Global Portfolios Limited (“FTGP”) nor any of its affiliates, guarantees the performance or the future returns of the Fund.
For more details relating to risks of investing in the Fund, please refer to the “Risk Factors” section of the Fund’s prospectus
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This report is issued by First Trust Global Portfolios Limited (“FTGP”) of 8 Angel Court, London, EC2R7HJ. FTGP is authorised and regulated by the UK Financial Conduct Authority (“FCA”) (register no. 583261). The Fund is not regulated by the FCA.
Nothing contained herein constitutes investment, legal, tax or other advice and it is not to be solely relied on in making an investment or other decision, nor does the document implicitly or explicitly recommend or suggest an investment strategy, reach conclusions in relation to an investment strategy for the reader, or provide any opinions as to the present or future value or price of any fund. It is not an invitation, offer, or solicitation to engage in any investment activity, including making an investment in the Fund, nor does the information, recommendations or opinions expressed herein constitute an offer for sale of the Fund.
The Fund is an open-ended sub-fund of the First Trust Global Funds PLC (the “Company”), an umbrella UCITS fund with segregated liability between sub-funds, incorporated with limited liability as an investment company with variable capital under the laws of Ireland with UCITS registered number 514357.
The material in this document is not comprehensive and must therefore be read in conjunction with the Fund’s prospectus, which contains material information not contained herein, including the terms of investment and information regarding investment risks and restrictions, fees and expenses and conflicts of interests. Potential investors should pay particular attention to the risk disclosures in the “Risk Factors” section of the Fund’s prospectus. No assurance can be given that the Fund’s investment objective will be achieved or that the Fund will generate a positive return. Contact FTGP or visit www.ftglobalportfolios.com to obtain a Prospectus and/or Key Investor Information Document (available in English).
Shares of the Fund are not available for sale in any state or jurisdiction in which such sale would be prohibited. The shares of the Fund have not been registered under the US Securities Act of 1933, as amended, and the Fund is not registered under the US Investment Company Act of 1940, as amended. Neither this material nor the Fund’s shares are available to or suitable for US persons.
UCITS ETF’s units / shares purchased on the secondary market cannot usually be sold directly back to UCITS ETF. Investors must buy and sell units / shares on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units / shares and may receive less than the current net asset value when selling them.
Portfolio Holdings Disclosure Policy:
The Company’s portfolio holdings policy is designed to be transparent, whilst being in the best interest of the Funds and protecting the confidentiality of each Fund’s portfolio holdings. The full portfolio holdings for the Fund shall generally be available daily, with a one-day lag, on www.ftglobalportfolios.com. Any portfolio holdings information which may otherwise be provided on request shall be provided on a confidential basis.
For Investors in the UK
This document is only for, or directed at persons who are professional clients or eligible counterparties for the purposes of the FCA’s Conduct of Business Sourcebook. This document is exempt from the scheme promotion restriction (in Section 238 of the Financial Services and Markets Act 2000 (“FSMA”) on the communication of invitations or inducements to engage in investment activity) on the grounds that it is a recognised collective investment scheme (a “recognised scheme”) for the purposes of section 264 of the FSMA of the UK. Most of the protections provided by the UK regulatory system do not apply to the operation of the Fund and compensation will not be available under the UK Financial Services Compensation Scheme on its default.
For Investors in Italy
This information document is addressed to professional investors only, as defined in Directive 2004/39/EC of 21 April 2004 (MiFID). The present document does not constitute in any way an offer or recommendation to make investments in the Fund or to execute other transactions in relation to the latter. The investors shall consult with their investment consultants in order to analyse the legal, fiscal and accounting aspects of the investment or other transactions concerning the investment in the Fund and evaluate whether such investment or transaction is suitable to their own risk profile, financial status and investment objectives. The Fund has been registered with the Commissione Nazionale per le Societá e la Borsa (CONSOB) for the offer in Italy towards professional investors only. Before taking any investment decisions, the prospected investors should read carefully the KIID (available in Italian) and the Prospectus on the following website www.ftglobalportfolios.com.
For Investors in Norway
This document is only for the attention of “Professional” investors as defined in Directive 2004/39/EC dated 21 April 2004 on Markets in Financial Instruments (MIFID). The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. The Fund has been registered with the Financial Supervisory Authority of Norway (Finanstilsynet) in accordance with the Norwegian Securities Funds Act section 9-3, in order to market its shares for sale to professional investors only in Norway.
For Investors in Austria
The Fund is registered for public offer in Austria. The Prospectus, Key Investor Information Document (“KIID”) and other documents, as well as the annual and semi-annual reports have been published in Austria and are available free of charge from Erste Bank der österreichischen Sparkassen AG, Graben 21, A-1010 Wien, the Austrian paying and information agent.
For Investors in Germany
This document is only for the attention of “Professional” investors as defined in Directive 2004/39/EC dated 21 April 2004 on Markets in Financial Instruments (“MIFID”), to investment services providers and any other professional of the financial industry. The offering of the First Trust US IPO Index UCITS ETF by the Company has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with Section 310 of the German Investment Code (KAGB). Prospective investors may obtain the KIID in German and the current Prospectus, the articles of incorporation, as well as the latest annual and semi-annual report, in English, free of charge from FinCo Financial Communications GmbH, Großer Burstah 42, 20457 Hamburg.
For Investors in the Netherlands
This document is only for the attention of “Professional” investors as defined in Directive 2004/39/EC dated 21 April 2004 on Markets in Financial Instruments (“MIFID”), to investment services providers and any other professional of the financial industry. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. The Company has completed its notification to the Authority Financial Markets (Stichting Autoriteit Financiele Markten) in the Netherlands in order to market its shares for sale to the public in the Netherlands according to Section 2:72 of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) as amended from time to time.
For Investors in Luxembourg
The Fund is registered for public offer in Luxembourg. The Prospectus, Key Investor Information Document (“KIID”) and other documents as well as the annual and semi-annual reports are available in English free of charge from CACEIS Bank Luxembourg, 5, allée Scheffer, L-2520 Luxembourg.
For Investors in Belgium
The offering of shares has not been and will not be notified to the Belgian Financial Services and Markets Authority (Autoriteit voor Financiële Diensten en Markten/Autorité des Services et Marchés Financiers) nor has this document been, nor will it be, approved by the Financial Services and Markets Authority. Shares may be offered in Belgium only to professional investors, in reliance of article 5, §1 of the Law of August 3, 2012 on collective investment undertakings that satisfy the conditions of Directive 2009/65/EC and undertakings for investments in receivables (the “Law of August 3, 2012”), such investors acting for their own account and subject to them complying with the resale condition as set forth in that article 5, §1 of the Law of August 3, 2012.
For Investors in Switzerland
The distribution of shares in Switzerland will be exclusively made to, and directed at, qualified investors (the “Qualified Investors”), as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended (“CISA”) and its implementing ordinance. Accordingly, the Fund has not been and will not be registered with the Swiss Financial Market Supervisory Authority (FINMA). This document and/or any other offering materials relating to the Fund may be made available in Switzerland solely to Qualified Investors. For this, the Fund has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland, Tel: +41 21 311 17 77, email: [email protected] The Fund’s paying agent is Banque Cantonale de Genève. Any Fund Documentation may be obtained free of charge from the Swiss Representative in Lausanne.
For Investors in Denmark
his document is only for the attention of “Professional” investors as defined in Directive 2004/39/EC dated 21 April 2004 on Markets in Financial Instruments (MIFID), to investment services providers and any other professional of the financial industry. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. The Fund has been registered with the Financial Supervisory Authority of Denmark (Finanstilsynet) in order to market its shares for sale to professional investors only in Denmark in accordance with the Danish Investment Associations Act and Executive Order on the Marketing of Foreign UCITS in Denmark, each as amended from time to time.
For Investors in Sweden
This document is only for the attention of “Professional” investors as defined in the Swedish Securities Markets Act (Sw. lag (2007:528) om värdepappersmarknaden), implementing Directive 2004/39/EC dated 21 April 2004 on Markets in Financial Instruments (MIFID) into Swedish law, to investment services providers and any other professional of the financial industry. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. The Fund has been registered with the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) in accordance with Chapter 1, Section 7 of the Swedish Securities Funds Act (Sw. lag (2004:46) om värdepappersfonder), as amended from time to time. Prospective investors may obtain the KIID in Swedish and the current Prospectus, the articles of incorporation, as well as the latest annual and semi-annual report, in English, free of charge from www.ftgportfolios.com.
For Investors in Finland
This document is only for the attention of “Professional” investors as defined in Finnish law implementing Directive 2004/39/EC dated 21 April 2004 on Markets in Financial Instruments (MIFID), to investment services providers and any other professional of the financial industry. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. The Fund has been registered with the Financial Supervisory Authority of Finland (Finanssivalvonta) in order to market its shares for sale to professional investors only in Finland in accordance with the Finnish Act on Common Funds (48/1999) as amended from time to time.
For Investors in Spain
This document is only for, or direct at persons who, are “professional clients” for the purposes of Article 205 of the Royal Legislative Decree 4/2015, of 23 October, which approves the recast text of the Securities Market Law. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. The Fund has been registered with the Comisión Nacional del Mercado de Valores (CNMV) in Spain with registration number 1545. Any investment decision must be based solely on the basis of a careful consideration and understanding of all information contained in the latest Fund’s prospectus and key investor information document (KIID). All mandatory official documentation (including the prospectus and the KIID) shall be available through the relevant distributors in Spain, in hard copy or by electronic means, and also available free of charge upon request by dialling +44(0)203 195 7121, writing to [email protected] or consulting www.ftgportfolios.com, where you may also obtain updated information on the net asset value of the relevant shares. It is advisable to obtain further information and request professional advice before taking an investment decision.