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DEFINITION of 'IPO ETF'

An exchange-traded fund that focuses on stocks that have recently held an initial public offering (IPO). The underlying indexes tracked by IPO ETFs vary from one fund manager to another, but index IPO ETFs are usually passively managed and contain equities that have recently been offered to the public. By investing in an IPO ETF, investors hope to gain exposure to IPOs during their initial introduction to the market, while diversifying their investment across a pool of IPOs from varying sectors and industries.

BREAKING DOWN 'IPO ETF'

The main appeal behind IPO ETFs is that investors want to be in "on the ground floor" of an up-and-coming company, and take advantage of the potential upside growth in the share price. IPOs, however, are not guaranteed to be successful holdings and may even decrease in value in the weeks and months following the initial offering. In addition, expenses and fees associated with ETFs can eat away at earnings accrued by these specialty ETFs.

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