For last two years, the U.S. IPO market went through the roof thanks to an improving economy, a rock-bottom interest rate environment and an even more impressive performance by the U.S. stock indices. While many hoped for the continuation of the stock market surge in 2015 as well, in reality volatility took center stage.
Rising rate worries, a strong greenback and later a moderation in U.S. growth raised certain concerns over domestic investing. This might have taken a toll on IPO activity too. The data of Renaissance Capital also bears evidence to this fact.
Per Renaissance, after a massive run last year, the IPO market cooled down considerably in the first quarter of 2015. In the quarter, 34 IPOs raised $5.4 billion, making Q1 of 2015 the most inactive by IPO tally since 1Q 2013. Also, proceeds from IPO was the least since 3Q 2011.
Only, the health care sector managed to tread water in the overall gloomy U.S. IPO market, though it was also not error-free. In Q1 of 2015, 'eight of the 10 worst-performing offerings' hailed from the health care sector (read: Cooling IPO Market Puts These ETFs in Focus).
Global Trends Look Solid
Contrary to the U.S. market, global markets are displaying bullish IPO trends thanks mainly to the policy differential between the U.S. and the other developed nations. Extremely low levels of interest rates in many developed nations and a QE program launch by the ECB led to surging global corporate activity (read: 3 European ETFs Leading the Market Higher).
As per a report by Renaissance Capital, in terms of IPO proceeds, Europe topped the list accounting for about half of the global deals. Asia-Pacific took the second spot with more than 30% exposure of the total mainly thanks to the China A-Shares boom. Asia Pacific IPOs gained 140.1% on average again on skyrocketing China A-shares. China A-shares apart, the average global IPOs advanced a decent 17.9%.
IPO or IPOS: Which One a Better Choice?
Given this situation, global IPOs look more lucrative than the domestic option. Incidentally, Renaissance Capital has IPO ETFs for both domestic and international markets. Below we highlight both funds in detail and find out key differences between them.
Renaissance International IPO ETF (NYSEARCA:IPOS)
The fund tracks the Renaissance International IPO Index. The index includes a decent number of new companies after the fifth day of trading (important firms on a fast-entry basis) and the remaining after slated quarterly reviews. Two years after their IPOs, the stocks get out of the index. The product charges 80 bps in fees (read: Invest in Global IPOs with This New ETF).
The ETF puts the largest weight of 49% in Europe followed by 17% in Asia, 16% in the Asia-Pacific. North America gets about 13% of the basket. The top holdings of the fund consist of Deutsche Annington Immobilien (5.36%), Altice SA (4.97%) and Samsung SDS Co Ltd (3.50%). Overall, the ETF holds about 100 stocks with about 35% of assets invested in the top 10 holdings. Large and mid cap stocks each accounts for about 35% of the fund.
From a sector look, there is a tilt toward industrial stocks (22%), while financials (17%) and consumer discretionary (15%) round out the three positions. Notably consumer and transportation IPOs led the way in Q1. Thus, considerable focus in consumer stocks should be an added advantage for the product. Several segments - like energy (1%) and telecom (1%) - receive meager allocations in the ETF. IPO is up about 12% so far this year (as of April 15, 2015).
Renaissance IPO ETF (NYSEARCA:IPO)
Holding 56 stocks in the basket, the fund follows the Renaissance IPO Index, which holds the largest and most liquid newly listed U.S. initial public offerings. New companies seek inclusion on a 'fast entry basis' on the fifth day of trading. Currently, the product allocates more to Twitter (NYSE:TWTR) at 10.12%, closely followed by Alibaba (NYSE:BABA) (9.52%) and Hilton (NYSE:HLT) (6.16%). Mid caps rule the portfolio with over half of the allocation.
IPO ETF has attracted $29 million in its asset base. The ETF sees low volume of nearly 10,000 shares, suggesting additional cost beyond the expense ratio of 0.60%. From a sector look, technology stocks make up for over one-third share followed by consumer discretionary (20%), financials (17%) and health care (10%). The fund has added 9% year-to-date.
Though the scenario in the U.S. may turnaround in Q2, a policy-tightening concern might retard the IPO issuance pace at home. On the other hand, global IPO issuance should head higher helped by a flurry of cheap money and increased corporate activities. Renaissance noted that the pipeline for global IPOs has grown to as much as $330 billion in 'expected proceeds'. Thus, this seems better to look abroad to capitalize on the global IPO resurgence.