Tech IPO ETF Soars Past Market

The so-called FAANG stocks have long been favorites among investors everywhere, and with good reason. These and similar companies, which are by and large tech focused, have seen excellent growth and returns for investors. Now, however, a report by Bloomberg suggests that there may be even stronger performance available in a group of tech companies that are less well known. The best way to access these companies? Via an exchange-traded fund (ETF).

Tech IPOs Show Strength

A number of newly listed tech companies have outperformed their better established and large-cap peers, according to the report. Thanks to this performance, a small ETF focusing on stocks that have recently gone public has seen gains of 7.6% for the first half of the month of June. For comparison, during the same time period, the Nasdaq 100 Index climbed by 4.8%, while the S&P 500 rose by 3.1%.

The ETF, called the Renaissance IPO ETF (IPO), has seen success thanks to the booms of several new entries into the tech sector. Among these are the Chinese video entertainment outfit iQIYI, Inc. (IQ), Spotify Technology S.A. (SPOT), Snap Inc. (SNAP) and Dropbox, Inc. (DBX). Notably absent from the list of stocks in the fund's basket are any of the biggest names in the tech world; one will not find companies like Facebook, Inc.(FB) or Alphabet Inc. (GOOGL), as they are too far removed from their own initial public offerings to qualify. (See also: How to Track Upcoming IPOs.)

IPO Fund

The Renaissance IPO ETF tracks newly listed companies according to market capitalization. In order to be included in the fund's holdings, a company must be among the top 80% or so of new IPOs that have yet to be included in major U.S. equity indexes like the S&P 500 or the Nasdaq Composite. In order to best capitalize on the success of these brand new entries into the world of public trading, the Renaissance IPO ETF adds names on a "fast entry" basis, particularly if the IPO is sizable. Other companies are reviewed each quarter and added on that schedule.

Regardless of the success or failure of the stock following the IPO, names are removed from the fund two years after their first day of trading. It is this last point that makes the IPO fund different from many other ETFs. While some funds would be content holding successful companies for the long term, IPO consistently searches for new names. By guaranteeing that no stock is included in its basket for more than two years, it aims to constantly revitalize its holdings.

Currently, Spotify is the largest holding for the fund, comprising more than 7% of its portfolio. US Foods Holding Corp. (USFD) comes in second place, with a weight of 5.7%. Snap follows these with 5.4% of the portfolio. Nonetheless, iQIYI has been the most important name for IPO so far; as of midway through June, the success of iQIYI has prompted gains of more than 57% for the month.

While IPO is at the mercy of the success of the latest public offerings, it has so far been a lucrative model. U.S. tech IPOs in general have been growing at a rapid pace this year, gaining 77% on average, weighted by offering size. This is compared with an average return of just 12% for non-tech U.S. listings that are new to public trading.

Triton Research CEO Rett Wallace suggests that "some people think this is the Uber market, that we're just going to run until the Uber IPO happens," adding that "people get excited for the big ones." So long as there continue to be "big ones" in the tech IPO space, it seems likely that the Renaissance IPO ETF will continue to find success. (For additional reading, check out: The Ups and Downs of Initial Public Offerings.)

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