Do you want the best access to the hottest IPOs?
This article will explore the way of investing in this hard-to-reach market. We just had a talk with Kathleen Smith, Founding Principal of Renaissance Capital, about two IPO ETFs her company offers.
ETFdb.com (ETFdb): What inspired the creation of ETFs that focus on IPOs investing?
Kathleen Smith (K.S.): Newly public companies enable investors to get exposure to the new economy in their portfolios prior to other indices. Newly public companies take time to be included in major indices, and when they are included, they are underweighted. IPO ETFs provide this missing piece of the public-equity universe.
ETFdb: What is an advantage of investing in an IPO ETF?
K.S.: An IPO ETF constructed to hold the larger, more liquid IPOs contributes enhanced returns to an investor’s equity portfolio, and because there is little overlap in holdings relative to broad market indices, the IPO ETF can provide enhanced returns as well as low correlation.
ETFdb: What is Renaissance Capital’s overall strategy?
K.S.: Renaissance Capital’s IPO investment products are intended to put the new economy to work in investors’ portfolios ahead of indices.
ETFdb: What are the main differences between the three products you offer?
K.S.: The Renaissance IPO ETF (IPO) and the Renaissance International IPO ETF (IPOS) are investment products that track the rules-based Renaissance IPO Indices. Renaissance Capital is the advisor to the Global IPO Fund and separately managed institutional accounts. These are actively managed products that may include shares purchased on the IPO.
ETFdb: Can you walk us through the construction process of your index?
K.S.: The Renaissance IPO Indices, calculated by FTSE Russell, are float-adjusted market cap weighted indices that hold a two-year rolling population of newly public companies. IPOs are eligible for inclusion if the IPO size is at least $100 million. Very large IPOs, such as the recent IPOs of First Data and Japan Post, are included on a fast-entry basis shortly after their IPO dates. The indices are rebalanced quarterly.
ETFdb: For your ETFs, what companies or sectors do you usually target?
K.S.: The Renaissance ETFs represent the sectors that are active in the IPO market. In recent years, the Renaissance IPO ETF has had a tilt to the technology and healthcare sectors, and the Renaissance International IPO ETF has had a tilt to the financial and industrial sectors.
ETFdb: As we saw this year, there were less IPOs in 2015 than in 2014. Which sectors, in terms of IPOs, have been overvalued? A lot of people are saying the tech-sector IPOs are overvalued (ex. Groupon, Alibaba, Angie’s List, Go Pro, Twitter). What is your view on this?
K.S.: The IPO market hit a 14-year peak in activity in 2014, and 2015 is shaping up to be a slightly below average year. The returns on IPOs have been strong over the past three years, outperforming their benchmarks. However, after strong outperformance through the first half of 2015, the IPO indices have turned negative. Much of the downturn in the U.S. IPO index related to poor performance from the energy sector and the large tech IPOs such as Alibaba and Twitter. In the international IPO index, China was a major contributor to underperformance. The 4Q has started out with a very strong comeback.
ETFdb: What kind of investor should invest in your ETFs?
K.S.: The Renaissance family of IPO ETFs are an economical way for individual investors to put the new economy to work in their portfolios while avoiding the risk of single stock selection. For RIAs and institutions, these products add value to portfolio allocation strategies by providing enhanced returns with low correlation.