ETF Tracking Aftermarket IPOs On The Way?

by: SA Editors

IndexUniverse notes that First Trust Advisors filed for an ETF on the IPOX-100 index, which tracks the U.S. IPO market:

The IPOX-100 is a sub-index of the broader IPOX Composite, which includes all U.S. IPOs. The Composite incorporates companies on the seventh trading day after they go public, and holds them through their 1,000th trading day – about four years. The IPOX-100 selects the 100 largest and best performing IPOs... Currently, the largest holding is Google. The index also includes spin-offs, which help make it more stable, as they tend to be established, profitable companies...

One question many investors will ask is the origins of the seemingly arbitrary holding period, from 7 to 1,000 days after companies go public. The seven day waiting period is easy to understand, as IPOs can fluctuate wildly when they initially come to market. But why 1000 trading days?

“Academically, you find that [during] the first four years of trading, IPOs are different from other equities," said [Josef Schuster, founder and CEO of IPOX-Schuster, the creator of the index]. "After 4 years, they are more like the market. Moreover, if you define an index with 250 or 500 trading days, you don’t get the performance, and instead you get huge turnover in the index.