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Can IPO ETFs keep up with the hot IPO market?

The 2021 IPO class was littered with multi-billion dollar deals that made insiders rich. Companies like the cryptocurrency exchange Coinbase, the trading app Robinhood, the car manufacturer Rivian and the online gaming platform Roblox are among the biggest winners this year.

It was a historic year for the US IPO market in many ways. 94 companies went public in the third quarter – the most active third quarter in 21 years.

“While the fourth quarter may not beat the record pace of summer, 2021 will be considered the biggest year for IPO capital ever and the busiest year since the internet bubble in 2000,” said William K. Smith, CEO and Co-Founder at Renaissance Capital.

Dedicated acquisition companies, also known as SPACs, are another element of the US IPO market that has done brisk business. Five years ago, only $ 3.49 billion was raised in 13 SPACs. In 2021, 456 SPACs have gone public so far, raising a total of $ 130.29 billion.

Despite the rapid pace of new companies entering the public market, ETFs tied to new issues have seen mixed performance.

Since the beginning of the year, the Renaissance IPO ETF (whose ticker is IPO) has fallen 2.25%, while the First Trust US Equity Opportunities ETF (FPX) only gained 5.55% and the Defiance Next Gen SPAC-Derived ETF (SPAK) has fallen by 22.56%.

The oldest of this group is the First Trust Fund, formerly known as the First Trust US IPO Index Fund. It was launched in 2006 and tracks a modified weighted index of 100 US public offerings. The index uses a 10% cap mechanism to prevent companies from dominating the underlying index. Top positions within the FPX fund include Dell Technologies, Marvell Technology and Snap.

The Renaissance IPO exchange-traded fund is another choice for advisors looking to spice up client portfolios with newly formed public companies. The fund was also a real eye-catcher. It has posted blockbuster returns for the past two years, gaining 34.56% in 2019 and 107.34% in 2020.

The 106-share fund focuses almost 90% on large-cap stocks, the rest on mid-caps. The top positions include Moderna, Snowflake and Zoom Video Communications. The index is rebalanced quarterly and no single stock can represent more than 10% of the total portfolio.

SPACs make up a larger portion of the total IPO market – the 2021 market has grown so large that it is now outperforming traditional IPOs. SPACs account for 64% of all IPOs in terms of the sheer number of offers and 52% of total IPO capital raised. The latter number is really historic, as SPACs have never raised more capital than traditional IPOs.

The Defiance SPAK fund, which tracks this market, is celebrating its one year anniversary this month. The fund plays directly on the SPAC market and excludes traditional IPOs. His top positions are well-known SPAC names such as DraftKings, Paysafe and Virgin Galactic.

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