First Trust Global Portfolios, a leading global provider of exchange-traded funds, has listed the First Trust US IPO Index UCITS ETF in Europe on the London Stock Exchange (FPX LN) and Euronext Paris (FPXU FP). The fund has enjoyed considerable success in the US, gathering almost $900 million in assets, and has also performed strongly, delivering an average annual return of 11.8% since inception in 2006 and returning 20.9% per annum over the last five years.
The First Trust US IPO Index UCITS ETF currently has 11.7% of its assets invested in Facebook.
The fund tracks the IPOX 100 US Index and is designed to provide exposure to US companies which have recently had their Initial Public Offering (IPO).
The index is derived from the broader IPOX Global Composite Index, selecting the top 100 US firms ranked by market-capitalisation. The index is rebalanced quarterly.
Constituents are included for the first 1,000 trading days after their IPO and then withdrawn from the fund. Each constituent is subject to a cap of 10% which prevents the ETF from becoming too concentrated in the stock of a single firm. The fund has historically captured exposure to over 80% of the market-capitalisation of US IPOs, while tilting towards mid- and large-cap offerings.
Firms which have recently had their IPO come from a mix of backgrounds. Some are relatively new, high growth companies, others are more mature companies which have taken the decision to access the capital markets via a floatation, often to provide an exit for private equity owners, while others are spin-offs of conglomerates or larger companies.
Spin-off companies in particular have historically provided superior returns when compared to the broad equity market. For example, the Guggenheim Spin-off ETF, which tracks the Beacon Spin-off Index generated a return of 384% from 9 March 2009 (when the S&P 500 bottomed out after the financial crisis) up to the end of 2014. The S&P 500 returned 203% over the same period. Several reasons for this out-performance have been proposed including that investors generally favour pure-play companies that are focused on a core business rather than conglomerates. Secondly, the new management team of the spin-off often participates in the equity of the business, providing incentives for the efficient running and success of the new enterprise. Lastly, as the new business has a smaller market-cap compared to its parent, fund managers are forced to sell off their shares in the spun-off company when received to comply with the large-cap mandate of their portfolios. This may initially drive down prices allowing new buyers to obtain exposure at bargain prices.
With IPOs in general, increased investor scrutiny combined with more rigid transparency requirements often result in better governance of the firm, potentially boosting returns to investors. Furthermore, firms which are taken public have also usually established that a credible market exists for their products and are looking to distribute them on a far larger scale. Therefore, these firms are usually less risky than traditional private equity exposure and may provide significant medium-term gains.
As of 18 August, sector exposure was tilted towards technology (23.1%), consumer discretionary (22.2%), healthcare (21.2%), financials (10.5%) and energy (9.8%). Top holdings include Facebook (11.7%), AbbVie (10.0%), Kraft Food (4.4%), Phillips 66 (3.8%) and General Motors (3.5%).
The fund has a total expense ratio of 0.65%.