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What is an 'IPO ETF'

An IPO ETF is an exchange-traded fund that focuses on stocks that recently have held an initial public offering (IPO).

BREAKING DOWN 'IPO ETF'

The underlying indexes tracked by IPO ETFs vary by fund manager, 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 variuous sectors and industries. The main appeal of IPO ETFs is that investors want to able to invest in promising new issues to benefit from potential upside growth in the share price. But IPO success is not guaranteed and holdings may decrease in value following the initial offering. Expenses and fees associated with ETFs can reduce earnings accrued by these specialty ETFs.

An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

By owning an ETF, investors get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, investors have to pay the same commission to a broker that they'd pay on any regular order.

ETF factors

A common ETF asset threshold is at least $10 million. An ETF with lower assets may attract limited investor interest, which may translate into less liquidity and wider spreads. Generally speaking, the higher the trading volume for an ETF, the more liquid it is likely to be and the tighter the bid-ask spread. This is especially important in exiting an ETF position. From the point of view of diversification, it may be preferable to invest in an ETF that is based on a broad, widely followed index, rather than an obscure index that has a narrow industry or geographic focus. Most ETFs track their underlying indexes closely, but some do not. An ETF with minimal tracking error is preferable. And, the first ETF issuer for a particular sector may be able to garner the lion's share of assets before later issuers.

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