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Renaissance Capital, a leading provider of IPO (Initial Public Offering) research and investment services, has made a play in the fast-growing exchange-traded funds business with the launch of the Renaissance IPO ETF (IPO) on the NYSE Arca.
The fund is designed to offer investors efficient exposure to a portfolio of the most economically significant newly public US companies.
The IPO market should not be overlooked. With an average of $135 billion raised annually, the global IPO market is sizable and sustainable. Even during very weak market periods, such as the 2008 financial crisis, the IPO window has historically reopened after several months. Newly public companies represent an economically significant segment of the equity markets.
However, newly public companies are typically included in mainstream equity indices (such as the S&P 500 or Russell 3000) on a delayed basis, until they become seasoned in trading markets. This means investors often lack exposure to economically significant companies. For example, Google only made it into the S&P 500 index 591 days after its IPO while Visa has to wait some 638 days before it acceded to the index.
Renaissance Capital argues that by using a portfolio of unseasoned newly public companies, as provided the Renaissance IPO ETF, to complement core equity index exposures, investors can obtain more comprehensive exposure to the total equity market.
Commenting on the launch, Kathleen Smith, Chairman of Renaissance Capital, said: “The launch of the Renaissance IPO ETF, is a direct response to increased investor demand for systematic exposure to newly listed IPOs in a low-cost tax-efficient exchange-traded structure. When added to core US equity holdings, a portfolio of unseasoned publicly traded equities provides investors with more comprehensive exposure to the full set of US public equities.”
The fund is linked to the Renaissance IPO Index, an index developed in-house by Renaissance Capital. New companies are included in the index on a fast-entry basis on the fifth day of trading, or upon quarterly review, and are removed after two years when the IPOs become seasoned stocks. The index incorporates certain size, liquidity and free-float criteria to ensure investability.
As of October 21, 2013, top holdings in the index include a 10.9% position in leading social network Facebook, a 9.9% position in global animal health company Zoetis, formerly part of Pfizer, a 9.8% position in automotive parts manufacturer Delphi Automotive, a 9.2% position in global luxury fashion brand Michael Kors, and a 5.3% position in real estate broker Realogy. The fund has a total expense ratio of 0.60%.
The Renaissance Capital offering will compete against the First Trust US IPO Index ETF (FPX), also listed on the NYSE Arca. This fund, which launched in April 2006 and has $227 million in assets, tracks the IPOX-100 US Index, a modified value-weighted price index measuring the performance of the 100 largest, typically best-performing and most liquid US public offerings and spin-offs. The index is dynamically reconstituted as IPOs enter the index at their 7th trading day and exit automatically 1000 trading days thereafter. It has an expense ratio of 0.60%.