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U.S. IPO ETFs Recoil in 2017, What Lies Ahead?

After a subdued 2016, the U.S. IPO market vaulted to start 2017.About 25 IPOs fetched about $10 billion in the first quarter and another 31 IPOs in the second quarter till May 15, as per the source. This is in stark contrast to the start of 2016, with 1H16 being the worst first half of any year since 2009 in terms of the number of companies going public (read: Alarm Bells Ringing for IPO ETFs?).

The rout in 2016 can mainly be accredited to overvaluation concerns. Plus, the year saw a chaotic start due to China and oil-led worries. After a shaky ride, it ended the first half with Brexit-blues. 

 How Things Are Shaping Up in 2017

As per the source, 2017 is likely to see “the first annual increase in IPOs in four years.” Most IPOs were seen from the energy, technology and healthcare sectors. A$3.4 billion Snap IPO led the tech sector to amass the largest amount of money. The rock-solid fundamentals of the tech sector this year makes the case realizable (read: Should You Invest in Snap Via IPO ETFs?).

Not only this, according to the source, “the energy sector had the highest number of IPOs, with five companies going public last quarter—more than the total number of energy IPOs in all of 2016.” OPEC output cut deal, hopes of oil price recovery and rising activity in the U.S. energy sector probably led energy companies to join the IPO activity.

The median deal size in Q1 of 2017 was $190 million, “the largest it has been in years and double the full-year 2016 median.” Till May 15, 2017, 56 U.S. IPOs were recorded, marking a 154.5% rise from the year-ago level.

What is Reviving U.S. IPOs This Year?

J.P. Morgan indicated last year that “the increasing regulatory burden on financial institutions engaged in IPOs, have led to a shift in how private companies realize their value.” All these issues brought down the number of publicly listed companies by 46% from the high of 8,025 in 1996.

However, with Trump clamoring for deregulation in the financial sector, things may improve this year onward. Plus, the Fed’s rate hike trajectory is another key concern. If the Fed speeds up tightening, bond yields may go up considerably, which in turn will dull the appeal of debt financing.

Moreover, the calmness of 2016 resulted in pent-up demand for IPOs or a pile of private companies seeking to go public. If these were not enough, the Trump rally and higher corporate earnings charged up U.S. markets lately. The IPO mood should also perk up. This along with an improving U.S. economy, as being witnessed now, should take the IPO momentum forward.

As per Renaissance Capital, “the number of pricings will come down in June from May’s 17 deals as the active pipeline has been steadily shrinking in 2017.” However, six companies have already filed for IPOs in June. So all in all, things have started improving. This is especially true with June historically being one of the busiest months for IPOs (read: Should You Buy IPO ETFs on Busy Activity?)

Below we highlight two IPO ETFs for investors who want to go deeper into the ETF world and follow the movement of these two funds.

Renaissance IPO ETF IPO

This 46-stock ETF provides exposure to the booming U.S. IPO market by tracking the Renaissance IPO Index. “Sizeable IPOs are added on a fast entry basis and the rest are added during scheduled quarterly reviews. Companies are removed two years after their initial trade date, when they become seasoned equities,” as per the issuer.

The product has a nice mix of sectors, with the top four being technology, consumer discretionary, industrial and consumer staples. It charges 60 bps in fees a year. The fund is up 22.7% so far this year (as of June 13, 2017) against 9.9% gains offered by S&P 500-based (SPY) and 17.8% gains delivered by Renaissance International IPO ETF IPOS.

First Trust US Equity Opportunities ETF FPX

This ETF follows the IPOX Global Composite Index. Currently, the product holds 101 securities in its basket with the largest allocation going to AbbVie (10.14%), The Kraft Heinz Company (9.61%) and PayPal Holdings (5.89%).

From a sector look, information technology make up for one-fourth share while health care, consumer discretionary and consumer staples round off the next three spots with a double-digit exposure each. It charges 60 bps in annual fees and has added 10.6% year to date (as of June 13, 2017).

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RENAIS-IPO ETF (IPO): ETF Research Reports
 
FT-IPOX 100 (FPX): ETF Research Reports
 
RENAIS-INT IPO (IPOS): ETF Research Reports
 
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